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Volatile public spending in a model of money and sustainable growth

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    Abstract

    In a model where seignorage provides the financing instrument for the government’s budget, public spending volatility has an adverse effect on long-run growth. This negative relationship arises because the incidence of volatility in this type of public policy is responsible for higher average money growth, thus induces individuals to devote less time/effort towards capital accumulation. Another implication of the model is that policy variability provides a possible argument behind the positive correlation between inflation and inflation variability.

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    File URL: http://www.lboro.ac.uk/departments/ec/RePEc/lbo/lbowps/DV_7.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2007_18.

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    Date of creation: Jul 2007
    Date of revision: Jul 2007
    Handle: RePEc:lbo:lbowps:2007_18

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    Keywords: Growth; Inflation; Seignorage; Volatility;

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    1. Stanley Fischer & Ratna Sahay & Carlos A. Végh Gramont, 2002. "Modern Hyper- and High Inflations," IMF Working Papers 02/197, International Monetary Fund.
    2. James M. Poterba & Julio J. Rotemberg, 1988. "Inflation And Taxation With Optimizing Governments," NBER Working Papers 2567, National Bureau of Economic Research, Inc.
    3. Judson, Ruth & Orphanides, Athanasios, 1999. "Inflation, Volatility and Growth," International Finance, Wiley Blackwell, vol. 2(1), pages 117-38, April.
    4. Devereux, Michael, 1989. "A Positive Theory of Inflation and Inflation Variance," Economic Inquiry, Western Economic Association International, vol. 27(1), pages 105-16, January.
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    7. Hopenhayn, Hugo A & Muniagurria, Maria E, 1996. "Policy Variability and Economic Growth," Review of Economic Studies, Wiley Blackwell, vol. 63(4), pages 611-25, October.
    8. Robert J. Barro, 1995. "Inflation and Economic Growth," NBER Working Papers 5326, National Bureau of Economic Research, Inc.
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    10. Stilianos Fountas & Menelaos Karanasos, 2002. "Inflation, Output Growth, and Nominal and Real Uncertainty: Empirical Evidence for the G7," Working Papers 0064, National University of Ireland Galway, Department of Economics, revised 2002.
    11. Wilson, Bradley Kemp, 2006. "The links between inflation, inflation uncertainty and output growth: New time series evidence from Japan," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 609-620, September.
    12. Dimitrios Varvarigos, 2007. "Policy Variability, Productive Spending and Growth," Economica, London School of Economics and Political Science, vol. 74(294), pages 299-313, 05.
    13. Logue, Dennis E & Willett, Thomas D, 1976. "A Note on the Relation between the Rate and Variability of Inflation," Economica, London School of Economics and Political Science, vol. 43(17), pages 151-58, May.
    14. Dotsey, Michael & Sarte, Pierre Daniel, 2000. "Inflation uncertainty and growth in a cash-in-advance economy," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 631-655, June.
    15. Joshua Aizenman & Nancy Marion, 1991. "Policy Uncertainty, Persistence and Growth," NBER Working Papers 3848, National Bureau of Economic Research, Inc.
    16. Brunetti, Aymo, 1998. "Policy volatility and economic growth: A comparative, empirical analysis," European Journal of Political Economy, Elsevier, vol. 14(1), pages 35-52, February.
    17. Thornton, John, 2008. "Inflation and inflation uncertainty in Argentina, 1810-2005," Economics Letters, Elsevier, vol. 98(3), pages 247-252, March.
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