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Vortragende Person/Vortragende Personen:
Sang Yoon (Tim) Lee - Queen Mary University of London

New Golden Rule

^{(joint with Alexandre Gaillard)}

Abstract: The difference between the risk-free rate r and the growth rate g of an economy is one of the most important indicators in macroeconomics. We build a heterogeneous agent, overlapping generations model in which both are endogenous to each other: The growth rate is determined by parents’ investments in children’s human capital, while the equilibrium interest rate is determined by the level of parents’ savings. We show that when parents are borrowing constrained, the economy is dynamically inefficient. Moreover, longer life-spans reduce both r and g, while also raising earnings inequality, qualitatively replicating patterns observed in advanced economies in the past half-century. We further assume these overlapping generations of workers coexist with capitalists, who accumulate wealth according to a standard model of capital returns heterogeneity with financial frictions. We show that the existence of financial frictions worsens dynamic inefficiency by further depressing the risk-free rate r, which itself is a function of g. When demographic shifts depress g and thus r, wealth concentration rises. Furthermore, a rise in investment risk faced by the capitalists can also depress r, which also leads to a rise in wealth concentration and stronger dynamic inefficiency. Against this backdrop of dynamic inefficiency, we revisit the question of whether taxing labor to subsidize capital is a valid tool for fast development in the context developing (rather than advanced) economies.

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