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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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    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. 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.
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    13. James M. Poterba & Julio J. Rotemberg, 1988. "Inflation And Taxation With Optimizing Governments," NBER Working Papers 2567, National Bureau of Economic Research, Inc.
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    15. Aizenman, Joshua & Marion, Nancy P, 1993. "Policy Uncertainty, Persistence and Growth," Review of International Economics, Wiley Blackwell, vol. 1(2), pages 145-63, June.
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