DP529 | Precautionary Saving, Government Policy and Growth in a Stochastic Cash-in-Advance Economy

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This paper uses a stochastic growth model with consumption, saving, portfolio choice between real capital and government bonds and money holding as a cash-in-advance constraint. It shows that money supply changes due to government expenditure changes or open market operations are never superneutral. In contrast, income tax changes only have nominal effects. Furthermore, Ricardian neutrality does not hold in the model. The real effects are weakened and nominal ones strengthened by increased risk aversion resulting in increased precautionary saving.