Fiscal and Monetary Policy in a Basic Endogenous Growth Model

Alfred Greiner

Computational Economics, 2015, vol. 45, issue 2, 285-301

Abstract: We present a monetary endogenous growth model and analyse the effects of fiscal and monetary policy with real money as an argument in the utility function. We show that a balanced government budget gives a higher balanced growth rate and lower inflation than a situation with permanent public deficits. It also leads to higher welfare compared to a situation with permanent deficits when the government does not put a high weight on stabilizing debt. However, when governments run deficits with a high weight on stabilizing debt, comparative welfare effects depend on the initial conditions with respect to public debt. Further, for a given monetary policy a stricter debt policy yields higher growth, lower inflation and higher welfare. A rise in the nominal money supply can compensate the negative growth effects of a loose debt policy up to a certain point but only at the cost of higher inflation and lower welfare. Copyright Springer Science+Business Media New York 2015

Keywords: Public debt; Monetary policy; Inter-temporal budget constraint; Economic growth; H63; E62; E52; O42 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s10614-014-9421-3

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