Fiscal policy and asset prices with incomplete markets
Journal
Review of Financial Studies
Subject
Finance
Publishing details
Authors / Editors
Gomes F J;Michaelides A;Polkovnichenko V
Biographies
Publication Year
2013
Abstract
We study the simultaneous impact of fiscal policy decisions on macroeconomic activity, wealth distribution, and asset prices. We consider a general equilibrium, overlapping generations model with incomplete markets and heterogeneous agents, where government debt and capital are imperfect substitutes. Increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium, while higher capital income tax rates lead to a higher equity premium. The crowding-out effects (on capital and output) are much higher than in models where government debt and capital are perfect substitutes, which thus ignore households' portfolio reallocation decisions.
Available on ECCH
No