Government Financing, Inflation, and the Financial Sector

Bernardino Adão and Andre Silva ()
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Bernardino Adão: Banco de Portugal

No 350, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We calculate the effects of an increase in government spending financed with labor income taxes or inflation. We consider government spending in the form of government consumption or transfers. We use a model in which agents increase the use of financial services to avoid losses from inflation, as empirically the financial sector increases with inflation. The financial sector size is constant in standard cash-in-advance models, which implies optimal positive inflation. We reverse this result when we take into account the increase in the financial sector. In our framework, it is optimal to use taxes to finance the government. This result is robust to alternative specifications and definitions of seigniorage and government spending

Date: 2019
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: Government financing, inflation, and the financial sector (2021)
Working Paper: Government financing, inflation, and the financial sector (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:350

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