Micro Risks and Pareto Improving Policies with Low Interest Rates

We provide sufficient conditions for the feasibility of a Pareto-improving fiscal policy when risk-free interest rate on government bonds is below growth rate. do so in class incomplete markets models pioneered by Bewley-Huggett-Aiyagari, but we allow an arbitrary amount ex ante heterogeneity terms preferences and income risk. consider both case dynamic inefficiency as well more plausible efficiency. The key condition that seigniorage revenue raised exceeds increase times initial capital stock. Pareto improving policies weakly expand every agent’s budget set at point time. improve risk sharing potentially guide economy to efficient level capital. In simulations, find must rely moderate levels debt issuance along transition new steady state.