Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system

Alexandru Minea and Patrick Villieu
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Alexandru Minea: CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique

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Abstract: We extend the [Barro, R., 1990. Government spending in a simple model of economic growth. Journal of Political Economy 98, 103–125] model to money financing of public expenditures, in a setup where money demand is motivated by a ‘‘transaction cost" technology, exhibiting the ‘‘cash-in-advance" specification as a special case, in the spirit of [Palivos, T., Yip, C., 1995. Government expenditure financing in an endogenous growth model: a comparison. Journal of Money, Credit and Banking 27, 1159–1178]. Allowing for productive public spending yields threshold effects between long-run growth and both income taxation and seigniorage, thus reproducing recent stylized facts. Moreover, in the cash-in-advance special case, we show that, to maximize long-run growth and/or welfare, government must use seigniorage-only or taxes only, depending on parameters, and in particular on the degree of financial development. In contrast, the general form of money demand motivated by a ‘‘transaction cost" technology produces interior solutions in which both seigniorage and taxes are used. An empirical section confirms our theoretical results.

Date: 2009
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Citations: View citations in EconPapers (11)

Published in Journal of Macroeconomics, 2009, 31, pp.304-319

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Related works:
Journal Article: Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system (2009)
Working Paper: Threshold Effects in Monetary and Fiscal Policies in a Growth Model: Assessing the Importance of the Financial System (2008)
Working Paper: Threshold Effects in Monetary and Fiscal Policies in a Growth Model: Assessing the Importance of the Financial System (2008)
Working Paper: Threshold Effects in Monetary and Fiscal Policies in a Growth Model: Assessing the Importance of the Financial System (2008)
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