| The net-wealth effect and cyclical role of monetary and fiscal policy are analyzed in a closed-economy setting featuring identical infinite-lived agents, certainty, perfect competition and non-distortionary taxation as well as generic transactions costs, which are introduced into the neoclassical setting via either a cash-in-advance or a cash-and-bonds-in-advance constraint, or a shopping-time constraint featuring money and/or bonds as liquidity. In this framework, a premium on equity over bonds is derived as a positive function of the present value of marginal liquidity services, and both bonds and money are shown to be negative components of private wealth. At the same time, a shift away from tax revenue into debt in public finance is shown to reduce effective discounting on prospective security returns and to prompt portfolio substitution out of Government bonds into capital, hence increasing net saving and inducing a positive net-wealth effect as well as a surge in real output and income. By raising unit transactions costs while reducing the present value of marginal liquidity services, anticipated inflation is shown to magnify the effective rate of discount on prospective security returns, thereby accelerating portfolio depreciation and reducing desired saving, on the one hand, and to tax capital more heavily than bonds, thereby inducing a portfolio switch out of stocks into bonds, on the other hand; hence, anticipated inflation proves to reduce net saving and to induce a negative net-wealth effect as well as a decline in real output and income in general equilibrium. |
