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Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries

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  • Marco Espinosa
  • Chong K. Yip

Abstract

This paper presents a framework that can help reconcile conflicting findings in the growth-inflation literature. Here, the behavior of financial intermediaries plays a crucial role in the determination of the economy's inflation and real growth rates. Absent any restrictions on financial intermediation, there will be a unique equilibrium when agents are fairly risk averse. In this case, an increase in seigniorage-financed government spending will always be inflationary and detrimental to growth. When agents exhibit a low degree of risk aversion, multiple equilibria emerge and a positive relation between inflation and growth a la Tobin can be observed. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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Bibliographic Info

Paper provided by Chinese University of Hong Kong, Department of Economics in its series Departmental Working Papers with number _094.

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Date of creation: Apr 1998
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Handle: RePEc:chk:cuhked:_094

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References

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  1. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  2. Champ, B. & Smith, B.D., 1991. "Currency Elasticity and Banking Panics: theory and Evidence," University of Western Ontario, The Centre for the Study of International Economic Relations Working Papers 9109, University of Western Ontario, The Centre for the Study of International Economic Relations.
  3. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  4. Barro, Robert J., 1990. "Government Spending in a Simple Model of Endogeneous Growth," Scholarly Articles 3451296, Harvard University Department of Economics.
  5. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  6. Theodore Palivos & Chong K. Yip, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Departmental Working Papers _057, Chinese University of Hong Kong, Department of Economics.
  7. Marco Espinosa & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," Working Paper 96-4, Federal Reserve Bank of Atlanta.
  8. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  9. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
  10. Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur réelle des recettes fiscales) (Inflación, desfases en la recaudación y ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
  11. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-90, October.
  12. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  13. Turnovsky, Stephen J, 1992. "Alternative Forms of Government Expenditure Financing: A Comparative Welfare Analysis," Economica, London School of Economics and Political Science, vol. 59(234), pages 235-52, May.
  14. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  15. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  16. Larry E. Jones & Rodolfo E. Manuelli, 1993. "Growth and the Effects of Inflation," NBER Working Papers 4523, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sugata Ghosh & Kyriakos C. Neanidis, 2013. "Corruption, Fiscal Policy, and Growth: A Unified Approach," CEDI Discussion Paper Series 13-05, Centre for Economic Development and Institutions(CEDI), Brunel University.
  2. Rangan Gupta, 2006. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Working Papers 200610, University of Pretoria, Department of Economics.
  3. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
  4. Hung, Fu-Sheng, 2003. "Inflation, financial development, and economic growth," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 45-67.
  5. Hernando Vargas, 1996. "Apertura, Encajes E Intermediación Financiera," ENSAYOS SOBRE POLÍTICA ECONÓMICA, BANCO DE LA REPÚBLICA - ESPE.
  6. Hung, Fu-Sheng, 2005. "Optimal composition of government public capital financing," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 704-723, December.
  7. Jill A. Holman, 2000. "Government budgetary policies, economic growth, and currency substitution in a small open economy," Research Working Paper RWP 00-08, Federal Reserve Bank of Kansas City.
  8. Rangan Gupta, 2004. "Costly State Monitoring and Reserve Requirements," Working papers 2004-33, University of Connecticut, Department of Economics, revised Jul 2005.
  9. Muhammad Iftikhar ul Husnain, 2010. "Expenditure-Growth Nexus: Does the Source of Finance Matter? Empirical Evidence from Selected South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 631–640.
  10. Holman, Jill A. & Neanidis, Kyriakos C., 2006. "Financing government expenditures in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1315-1337, August.
  11. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series 2354, CESifo Group Munich.
  12. Powers, Dennis, 2005. "Inside money and the effects of inflation," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 494-516, September.

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