Government financing in an endogenous growth model with financial market restrictions
AbstractIn this paper we develop an endogenous growth model with market regulations on explicitly modeled financial intermediaries to examine the effects of alternative government financing schemes on growth, inflation, and welfare. ; We find that in the presence of binding legal reserve requirements, a marginal increase in government spending need not result in a reduction in the rate of economic growth if it is financed with an increase in the seigniorage tax rate. Raising the seigniorage tax base by means of an increase in the reserve requirement retards growth and has an ambiguous effect on inflation. An increase in income tax—financed government spending also suppresses growth and raises inflation although not to the extent that the required seigniorage tax rate alternative would. Switching from seigniorage to income taxation as a source of government finance is growth-reducing but deflationary. From a welfare perspective, the least distortionary way of financing an increase in the government spending requirements is by means of a marginal increase in the seigniorage tax rate. Finally, under the specification of logarithmic preferences, the optimal tax structure is indeterminate.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2000-17.
Date of creation: 2000
Date of revision:
Other versions of this item:
- Marco A. Espinosa-Vega & Chong K. Yip, 2002. "Government financing in an endogenous growth model with financial market restrictions," Economic Theory, Springer, vol. 20(2), pages 237-257.
- Marco Espinosa & Chong K. Yip, 2000. "Government Financing in an Endogenous Growth Model with Financial Market Restrictions," Departmental Working Papers _118, Chinese University of Hong Kong, Department of Economics.
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
This paper has been announced in the following NEP Reports:
- NEP-ALL-2000-10-31 (All new papers)
- NEP-DGE-2000-10-31 (Dynamic General Equilibrium)
- NEP-PUB-2000-10-31 (Public Finance)
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