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Government financing, inflation, and the financial sector

Bernardino Adao and Andre Silva ()

FEUNL Working Paper Series from Universidade Nova de Lisboa, Faculdade de Economia

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. JEL codes: E52, E62, E63

Keywords: fiscal policy; monetary policy; government financing; demand for money; financial sector (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018
New Economics Papers: this item is included in nep-cba, nep-dge and nep-mac
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Working Paper: Government Financing, Inflation, and the Financial Sector (2019) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:unl:unlfep:wp621

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