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The welfare effects of government's preferences over spending and its financing

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Author Info
Alper, C. Emre
Ardic, Oya Pinar
Mumcu, Ayşe
Saglam, Ismail

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Abstract

In this paper we examine the welfare effects of government's preferences over consumption and investment spending under different methods of financing in a two-period OLG model. The government has a utility function defined over the decomposition of her spending over two periods and raises funds by issuing bonds and by printing money. She allocates her funds into consumption expenditure that benefits the current population and investment expenditure which benefits the future population. The model is calibrated using data on the U.S. economy for the period 1981-2004. The findings reveal that the government's choice of financing as well as composition of spending into consumption-investment have differing impacts on the welfare of the young and old generations.

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File URL: http://mpra.ub.uni-muenchen.de/1911/
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 1911.

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Date of creation: May 2006
Date of revision: Jan 2007
Handle: RePEc:pra:mprapa:1911

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Related research
Keywords: Seigniorage; Bond financing; Composition of government spending; Overlapping generations;

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Find related papers by JEL classification:
O42 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models
E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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  1. Ardagna, Silvia, 2001. " Fiscal Policy Composition, Public Debt, and Economic Activity," Public Choice, Springer, vol. 109(3-4), pages 301-25, December. [Downloadable!] (restricted)
  2. Buiter, Willem H, 1997. "Generational Accounts, Aggregate Saving and Intergenerational Distribution," Economica, London School of Economics and Political Science, vol. 64(256), pages 605-26, November. [Downloadable!] (restricted)
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  3. Aschauer, David Alan, 1985. "Fiscal Policy and Aggregate Demand," American Economic Review, American Economic Association, vol. 75(1), pages 117-27, March. [Downloadable!] (restricted)
  4. Giovanni Ganelli, 2005. "The International Effects of Government Spending Composition," IMF Working Papers 05/4, International Monetary Fund. [Downloadable!]
  5. Hung, Fu-Sheng, 2005. "Optimal composition of government public capital financing," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 704-723, December. [Downloadable!] (restricted)
  6. Jovanovic, Boyan, 1982. "Inflation and Welfare in the Steady State," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 561-77, June. [Downloadable!] (restricted)
  7. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall. [Downloadable!]
  8. Helpman, Elhanan & Sadka, Efraim, 1979. "Optimal Financing of the Government's Budget: Taxes, Bonds, or Money?," American Economic Review, American Economic Association, vol. 69(1), pages 152-60, March. [Downloadable!] (restricted)
  9. Aschauer, David Alan & Greenwood, Jeremy, 1985. "Macroeconomic effects of fiscal policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 23(1), pages 91-138, January. [Downloadable!] (restricted)
  10. David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-49, Part I, M. [Downloadable!] (restricted)
  11. Finn, Mary G, 1998. "Cyclical Effects of Government's Employment and Goods Purchases," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(3), pages 635-57, August.
  12. Auerbach, Alan J & Gokhale, Jagadeesh & Kotlikoff, Laurence J, 1994. "Generational Accounting: A Meaningful Way to Evaluate Fiscal Policy," Journal of Economic Perspectives, American Economic Association, vol. 8(1), pages 73-94, Winter. [Downloadable!] (restricted)
  13. Kormendi, Roger C, 1983. "Government Debt, Government Spending, and Private Sector Behavior," American Economic Review, American Economic Association, vol. 73(5), pages 994-1010, December. [Downloadable!] (restricted)
  14. Ganelli, Giovanni, 2003. "Useful government spending, direct crowding-out and fiscal policy interdependence," Journal of International Money and Finance, Elsevier, vol. 22(1), pages 87-103, February. [Downloadable!] (restricted)
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