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Government financing in an endogenous growth model with financial market restrictions

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Author Info
Marco A. Espinosa-Vega
Chong K. Yip

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Abstract

In 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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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2000-17.

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Date of creation: 2000
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Handle: RePEc:fip:fedawp:2000-17

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Keywords: Finance; Public ; Fiscal policy ; Financial markets;

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. van der Ploeg, Frederick & Alogoskoufis, George S, 1994. "Money and Endogenous Growth," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(4), pages 771-91, November. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. Wang, P., 1991. "Money, Competitive Efficiency and Intergenerational Transactions," Papers 10-91-6, Pennsylvania State - Department of Economics.
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  1. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  2. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Comparing Seasonal Forecasts of Industrial Production," Centre for Growth and Business Cycle Research Discussion Paper Series 103, Economics, The Univeristy of Manchester. [Downloadable!]
  3. N Bose & J A Holman & K C Neanidis, 2005. "The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?," Centre for Growth and Business Cycle Research Discussion Paper Series 57, Economics, The Univeristy of Manchester. [Downloadable!]
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  4. Michele Berardi, 2008. "Fundamentalists vs. chartists: learning and predictor choice dynamics," Centre for Growth and Business Cycle Research Discussion Paper Series 104, Economics, The Univeristy of Manchester. [Downloadable!]
  5. Beatrix Paal & Bruce D. Smith, 2001. "The sub-optimality of the Friedman rule and the optimum quantity of money," IEHAS Discussion Papers 0113, Institute of Economics, Hungarian Academy of Sciences. [Downloadable!]
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