Fiscal Policies, Inflation and Capital Formation

35 Pages Posted: 3 May 2004

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER) (deceased); Harvard University (deceased)

Date Written: August 1978

Abstract

Three ways of averting "excess saving" have been emphasized in both theory and practice. The thrust of the Keynesian prescription was to increase the government deficit to provide demand for the resources that would not otherwise be used for either consumption or investment. In this way, aggregate demand would be maintained by substituting public consumption for private consumption. A second alternative prescription was to reduce the private saving rate. Early Keynesians like Seymour Harris saw the new Social Security program as an effective way to reduce aggregate saving. The third type of policy, developed by JamesTobin, relies on increasing the rate of inflation and making money less attractive relative to real capital. In Tobin's analysis, the resulting increase in capital intensity offsets the higher saving rate and therefore maintains aggregate demand. This paper will examine ways of increasing capital intensity without raising the rate of inflation. The analysis will also show why, contrary to Tobin's conclusion, a higher rate of inflation may not succeed in increasing investors' willingness to hold real capital.

Suggested Citation

Feldstein, Martin S., Fiscal Policies, Inflation and Capital Formation (August 1978). NBER Working Paper No. w0275, Available at SSRN: https://ssrn.com/abstract=260468

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) (deceased)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-868-3905 (Phone)
617-868-7194 (Fax)

Harvard University (deceased)

Littauer Center
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-2167 (Phone)
617-496-5444 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
25
Abstract Views
541
PlumX Metrics