Working Paper: CEPR ID: DP17651
Authors: Gaetano Bloise; Pietro Reichlin
Abstract: We reexamine the tests for dynamic inefficiency in productive overlapping-generations economies with stochastic growth. The size of real, long-term, safe interest rates relative to average GDP growth is an inconclusive test for dynamic inefficiency. A more accurate test should take into account the correlation between growth and the marginal utility of wealth. This typically restricts the room for inefficiency and welfare-improving policies. We also distinguish capital overaccumulation from an inefficient distribution of consumption risk. The refined test for capital overaccumulation is rather stringent: capital is not overaccumulated if the net dividend remains positive with some probability, as opposed to always, as in the original Abel et al. (1989)'s formulation
Keywords: Interest Rates
JEL Codes: D60; G1; E21; E62; H2; H21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low interest rates (E43) | dynamic inefficiency (D59) |
| interest rates (E43) | growth rates (O40) |
| capital returns (G12) | capital overaccumulation assessment (E22) |
| consumption risk misallocation (E21) | conditional Pareto inefficiency (D61) |
| low long yields (E43) | dynamic inefficiency (D59) |