2021 Fiscal Year Annual Research Report
The macroeconomic implications of a preference for wealth
| Project/Area Number |
19K23230
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| Research Institution | Sophia University |
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Principal Investigator |
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| Project Period (FY) |
2019-08-30 – 2022-03-31
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| Keywords | Secular stagnation / Labour market / Underemployment / Inequality / Macroeconomics / Wealth preference / Rational bubbles |
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| Outline of Annual Research Achievements |
The purpose of this research project is to analyze the macroeconomic implications of a preference for wealth in a series of projects joint with Japanese and international researchers. We have made important progress towards this purpose.
First, we have finalized our analysis of asset pricing and government debt sustainability. We show that rational bubbles can occur in a setup with infinitely-lived households, provided they obtain utility from wealth, if the real interest rate is below the economic growth rate (a state know as dynamic inefficiency). Our approach provides a microfoundation for rational bubbles. Applied to sovereign debt, we show that the fiscal space is substantially larger than conventionally assumed as households might be willing to hold debt not backed by primary surpluses. This paper is currently under review.
Usuing a similar framework with a continuum of households that are heterogenous with respect to their initial wealth, we show that a similar condition determines whether inequality is increasing or declining. Using mean-field game methods, we numerically simulate the wealth dynamics implied by our model with the aim to replicate features of the empirical distribution.
Finally, we have substantially extended the scope of our labour market analysis to show that under persistent stagnation, generated by the preference for wealth, underemployment quickly dominates the slack in the labour market.
We hope that this extensive analysis of the implications of the wealth prefernce will prove fruitful for our future research as well as for other researchers.
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