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A NOTE ON THE ROBUSTNESS OF THE TOBIN EFFECT IN INCOMPLETE MARKETS

Published online by Cambridge University Press:  14 December 2005

MAKOTO SAITO  and
YOSUKE TAKEDA
MAKOTO SAITO
Affiliation:
Hitotsubashi University
YOSUKE TAKEDA
Affiliation:
Sophia University
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Abstract

Taking Dutta and Kapur's study (Review of Economic Studies 65, 551–572, 1998) as a case of the Tobin effect, this note investigates the extent to which the Tobin effect persists with the addition of sophisticated financial instruments in incomplete markets. On one hand, after dynamic contracts are introduced to the fullest extent, money demand as a precautionary device is crowded out completely, and there is thus no room for the Tobin effect to persist. On the other hand, the Tobin effect may be strengthened under conditions of coexistence of fiat money and dynamic insurance contracts with limited transfers thanks to relaxed incentive compatibility conditions in a moderately inflationary environment.

Keywords

Optimal Monetary PolicyIncentive Compatibility ConstraintIrreversible InvestmentTobin Effect
Type
NOTE
Information
Macroeconomic Dynamics , Volume 10 , Issue 1 , February 2006 , pp. 131 - 143
Copyright
© 2006 Cambridge University Press

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