Abstract
In long-term data, the dynamic efficiency condition, r>g, holds when g is the growth rate of GDP if r is the return on equity, re, but not if r is the risk-free rate, rf. This pattern accords with a disaster-risk model that fits observed equity premia. The equilibrium may feature rf≤g, which does not signal dynamic inefficiency. In contrast, re>g is required for dynamic efficiency, implied by the model, and consistent with data. With complete markets, the representative consumer's transversality condition translates into a no-Ponzi constraint on the public debt that the government can issue asymptotically. Therefore, fiscal changes do not affect the net wealth of the representative consumer, and Ricardian Equivalence holds. This result also holds in an example with incomplete markets where individual ownership of capital stocks cannot be fully diversified.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
