Economic growth and income inequality: The role of fiscal and monetary policy

Daisuke Miyashita ()
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Daisuke Miyashita: The University of Kitakyushu

Portuguese Economic Journal, 2025, vol. 24, issue 2, No 1, 204 pages

Abstract: Abstract In this paper, we develop a monetary endogenous growth model with heterogeneity of initial asset holdings and examine the relationships among fiscal and monetary policy, economic growth, and wealth and income inequality. We incorporate a flexible labor supply and money-in-the-utility approach to accomplish this. The origin of income inequality is heterogeneous endowments of initial assets, and this heterogeneity impacts both economic growth and income inequality through labor supply and real money holdings. In this model, the government-debt-to-private-capital ratio, government-debt-to-real-money-balance ratio, and average leisure determine the rate of asset return and the wage rate, which affect the economic growth rate and distribution across agents. By conducting a numerical simulation, we find a negative relationship between the economic growth rate and income inequality in the long term with strict fiscal discipline. Moreover, with the increasing money growth rate, we see a positive relationship between the economic growth rate and income inequality in the long term.

Keywords: Economic growth; Fiscal and monetary policy; Income inequality; Labor-leisure choice (search for similar items in EconPapers)
JEL-codes: E63 H30 H63 O42 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s10258-024-00267-4

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