Deficit Rules and Monetization in a Growth Model with Multiplicity and Indeterminacy

Maxime Menuet, Alexandru Minea and Patrick Villieu

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Abstract: In response to the Great Recession, Central Banks around the world adopted " unconven-tional " monetary policies. In particular, the Fed, and more recently the ECB, launched massive debt monetization programs. In this paper, we develop a formal analysis of the short-and long-run consequences of deficit and debt monetization, through an endoge-nous growth model in which economic growth interacts with productive public expenditure. This interaction can generate two positive balanced growth paths (BGP) in the long-run: a high BGP and a low BGP, and further, depending on the form of the CIA constraint, possible multiplicity and indeterminacy. Thus, monetizing deficits is found to be remarkably powerful. First, a large dose of monetization might allow avoiding, whenever present, BGP indeterminacy. Second, monetization always allows increasing growth and welfare along the (high) BGP, by weakening the debt burden in the long-run. Third, with a CIA on consumption only, monetization provides a rationale for deficits in the long-run: for high degrees of monetization, the impact of deficits and debts on economic growth and welfare becomes positive in the steady-state.

Keywords: great recession; Central Bank; monetary policies; deficit rules; Monetization; Growth Model (search for similar items in EconPapers)
Date: 2016-01-07
New Economics Papers: this item is included in nep-fdg
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Working Paper: Deficit Rules and Monetization in a Growth Model with Multiplicity and Indeterminacy (2015)
Working Paper: Deficit Rules and Monetization in a Growth Model with Multiplicity and Indeterminacy (2015)
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