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Limited asset market participation and fiscal sustainability

Author

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  • Noritaka Maebayashi

    (The University of Kitakyushu)

  • Jumpei Tanaka

    (The University of Kitakyushu)

Abstract

We examine the implications of limited stock market participation (the stylized fact that only a fraction of households directly own stocks) for economic growth and, in particular, fiscal sustainability. Constructing an overlapping generations model where (1) individuals can choose between two types of savings (i.e., physical capital with high returns but costly to hold and bank deposits with low returns but no costs), and (2) banks invest part of their total deposits in physical capital and use the rest to underwrite government debt, we show the following. First, an increase in the average level of an individual’s financial literacy worsens fiscal sustainability while promoting economic growth under plausible parameter values. Second, if banks decrease (resp. increase) the number of government bonds they underwrite, fiscal sustainability improves (resp. worsens) when the average financial literacy of individuals is relatively low.

Suggested Citation

  • Noritaka Maebayashi & Jumpei Tanaka, 2022. "Limited asset market participation and fiscal sustainability," Journal of Economics, Springer, vol. 137(1), pages 1-31, September.
    • Handle: RePEc:kap:jeczfn:v:137:y:2022:i:1:d:10.1007_s00712-022-00776-w
    DOI: 10.1007/s00712-022-00776-w
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    More about this item

    Keywords

    Limited asset market participation; Financial literacy; Fiscal sustainability; Public debt; Overlapping generations; Endogenous growth;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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