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Money and Growth Revisited

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  • Alogoskoufis, George
  • van der Ploeg, Frederick

Abstract

The Ramsey-Romer model of endogenous growth is extended to allow for holdings of real money balances and government debt as well as capital and for non-interconnected generations of households. Tax-financed increases in government consumption and debt depress growth prospects and boost inflation, as long as a positive birth rate ensures that future taxes are shouldered by future, yet unborn, generations. Debt-financed increases in government consumption depress growth and boost inflation even more. Money-financed increases in government consumption depress growth less but increase inflation by more. Giving subsidies through an increase in monetary growth is non-neutral, since this increases real growth and thus inflation increases by a lesser amount than monetary growth. Bond-financed increases in monetary growth lead to a larger increase in real growth and a smaller increase in inflation. If there are costs of adjustment for investment, cuts in monetary growth and increases in government debt and government consumption induce an increase in the real interest rate.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 532.

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Date of creation: Mar 1991
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Handle: RePEc:cpr:ceprdp:532

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Related research

Keywords: Endogenous Growth; Overlapping Generations; Population Growth; Ricardian Equivalence;

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References

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  1. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  2. Barro, Robert J. & Sala-i-Martin, Xavier, 1992. "Public Finance in Models of Economic Growth," CEPR Discussion Papers 630, C.E.P.R. Discussion Papers.
  3. Asako, Kazumi, 1983. "The Utility Function and the Superneutrality of Money on the Transition Path [Capital Accumulation on the Transition Path in a Monetary Optimizing Model]," Econometrica, Econometric Society, vol. 51(5), pages 1593-96, September.
  4. Miguel Sidrauski, 1967. "Inflation and Economic Growth," Journal of Political Economy, University of Chicago Press, vol. 75, pages 796.
  5. van der Ploeg, Frederick, 1991. "Money and Capital in Interdependent Economies with Overlapping Generations," Economica, London School of Economics and Political Science, vol. 58(230), pages 233-56, May.
  6. Marini, Giancarlo & van der Ploeg, Frederick, 1987. "Monetary and Fiscal Policy in an Optimizing Model with Capital Accumulation and Finite Lives," CEPR Discussion Papers 167, C.E.P.R. Discussion Papers.
  7. T. W. Swan, 1956. "ECONOMIC GROWTH and CAPITAL ACCUMULATION," The Economic Record, The Economic Society of Australia, vol. 32(2), pages 334-361, November.
  8. Dornbusch, Rudiger & Frenkel, Jacob A, 1973. "Inflation and Growth: Alternative Approaches," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 5(1), pages 141-56, Part I Fe.
  9. Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
  10. Fischer, Stanley, 1974. "Money and the Production Function," Economic Inquiry, Western Economic Association International, vol. 12(4), pages 517-33, December.
  11. Begg, David K H, 1980. "Rational Expectations and the Non-neutrality of Systematic Monetary Policy," Review of Economic Studies, Wiley Blackwell, vol. 47(2), pages 293-303, January.
  12. Buiter, Willem H, 1988. "Death, Birth, Productivity Growth and Debt Neutrality," Economic Journal, Royal Economic Society, vol. 98(391), pages 279-93, June.
  13. Rao Aiyagari, S. & Gertler, Mark, 1985. "The backing of government bonds and monetarism," Journal of Monetary Economics, Elsevier, vol. 16(1), pages 19-44, July.
  14. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  15. Feenstra, Robert C., 1986. "Functional equivalence between liquidity costs and the utility of money," Journal of Monetary Economics, Elsevier, vol. 17(2), pages 271-291, March.
  16. Swan, Trevor W, 2002. "Economic Growth," The Economic Record, The Economic Society of Australia, vol. 78(243), pages 375-80, December.
  17. Willem H. Buiter, 1986. "Death, Population Growth, Productivity Growth and Debt Neutrality," NBER Working Papers 2027, National Bureau of Economic Research, Inc.
  18. Alogoskoufis, G. & Van Der Ploeg, F., 1990. "Endogenous Growth And Overlapping Generations," Papers 9072, Tilburg - Center for Economic Research.
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Cited by:
  1. Patrick Honohan, 1994. "The Fiscal Approach to Financial Intermediation Policy," Papers WP049, Economic and Social Research Institute (ESRI).

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