Limited asset market participation and fiscal sustainability

• Published in: Journal of economics (Vienna, Austria) Vol. 137; no. 1; pp. 1 - 31
• Main Authors: Maebayashi, Noritaka, Tanaka, Jumpei
• Format: Journal Article
• Language: English
• Published: Vienna Springer Vienna 01-09-2022; Springer Nature B.V
• Subjects: Bank deposits; Capital; Cost control; Economic growth; Economic theory; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Expected utility; Financial literacy; Game Theory; GDP; Government; Government bonds; Gross Domestic Product; Households; Investments; Literacy; Macroeconomics/Monetary Economics//Financial Economics; Microeconomics; Public Finance; Securities markets; Social and Behav. Sciences; Sovereign debt; Stock exchanges; Sustainability; Limited asset market participation; Financial literacy; Public debt; H63; Endogenous growth; E13; G11; Overlapping generations; Fiscal sustainability
• ISSN: 0931-8658; 1617-7134
• DOI: 10.1007/s00712-022-00776-w

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.