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The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?

  • NILOY BOSE
  • JILL A. HOLMAN
  • KYRIAKOS C. NEANIDIS

"This paper explores how the optimal mode of public finance depends on the level of economic development. The theoretical analysis suggests that in the presence of capital market imperfection and liquidity shocks, the detrimental effect of inflation on growth is stronger (weaker) at lower (higher) levels of economic development. Consequently, income taxation (seigniorage) is a relatively less distortionary way of financing public expenditure for low-income (high-income) countries. We provide empirical support for our model's predictions using a panel of 21 Organization for Economic Cooperation and Development countries and 40 developing countries observed over the period 1972-1999." ("JEL" E44, E6, H6, O42) Copyright 2007 Western Economic Association International.

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Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 45 (2007)
Issue (Month): 3 (07)
Pages: 433-452

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Handle: RePEc:bla:ecinqu:v:45:y:2007:i:3:p:433-452
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  9. Klein,Martin & Neumann,Manfred, . "Seignorage: What is it and who gets it?," Discussion Paper Serie B 124, University of Bonn, Germany.
  10. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
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  12. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
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  17. Fischer, Stanley, 1982. "Seigniorage and the Case for a National Money," Journal of Political Economy, University of Chicago Press, vol. 90(2), pages 295-313, April.
  18. Pecorino, Paul, 1997. "The Optimal Rate of Inflation When Capital is Taxed," Journal of Macroeconomics, Elsevier, vol. 19(4), pages 657-673, October.
  19. Bhattacharya, Joydeep, et al, 1997. "Monetary, Fiscal, and Reserve Requirement Policy in a Simple Monetary Growth Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(2), pages 321-50, May.
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  23. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April.
  24. Chamley, Christophe, 1991. "Taxation of Financial Assets in Developing Countries," World Bank Economic Review, World Bank Group, vol. 5(3), pages 513-33, September.
  25. Joydeep Bhattacharya & Mark G. Guzman & Elisabeth Huybens & Bruce D. Smith, 1995. "Monetary, Fiscal, and Bank Regulatory Policy in a Simple Monetary Growth Model," Working Papers 9501, Centro de Investigacion Economica, ITAM.
  26. Drewes, Torben, 1987. "Regional Wage Spillover in Canada," The Review of Economics and Statistics, MIT Press, vol. 69(2), pages 224-31, May.
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