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Fiscal Policy and Economic Growth: the Role of Financial Intermediation

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  • Gilles Saint‐Paul

Abstract

This paper analyzes the impact of public debt on financial efficiency in an overlapping‐generations model. We argue that public debt may reduce intermediation costs by increasing the collateral of entrepreneurs. This effect is stronger, the stronger the non‐Ricardian component of public debt, i.e. the more it is associated with intergenerational redistribution. This effect can be interpreted as future generations acting as a guarantee for the loans provided to the entrepreneurs of the current generation. Furthermore, multiple growth paths may arise as low taxes increase private collateral, which in turn boosts growth via financial efficiency, while higher growth allows to maintain the same debt/GDP ratio with reduced taxes.

Suggested Citation

  • Gilles Saint‐Paul, 2005. "Fiscal Policy and Economic Growth: the Role of Financial Intermediation," Review of International Economics, Wiley Blackwell, vol. 13(3), pages 612-629, August.
    • Handle: RePEc:bla:reviec:v:13:y:2005:i:3:p:612-629
    DOI: 10.1111/j.1467-9396.2005.00526.x
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    References listed on IDEAS

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    1. Bacchetta, Philippe & Caminal, Ramon, 2000. "Do capital market imperfections exacerbate output fluctuations?," European Economic Review, Elsevier, vol. 44(3), pages 449-468, March.
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    Cited by:

    1. Grobéty, Mathieu, 2018. "Government debt and growth: The role of liquidity," Journal of International Money and Finance, Elsevier, vol. 83(C), pages 1-22.
    2. Skeie, David R., 2010. "Comment," LSE Research Online Documents on Economics 123269, London School of Economics and Political Science, LSE Library.
    3. Malamud, Semyon & Zucchi, Francesca, 2019. "Liquidity, innovation, and endogenous growth," Journal of Financial Economics, Elsevier, vol. 132(2), pages 519-541.
    4. George-Marios Angeletos & Fabrice Collard & Harris Dellas, 2023. "Public Debt as Private Liquidity: Optimal Policy," Journal of Political Economy, University of Chicago Press, vol. 131(11), pages 3233-3264.
    5. Mr. Geoffrey J Bannister & Mr. Luis D Barrot, 2011. "A Debt Intolerance Framework Applied to Central America, Panama and the Dominican Republic," IMF Working Papers 2011/220, International Monetary Fund.
    6. Augusto de la Torre & Alain Ize, 2010. "Containing Systemic Risk: Paradigm-Based Perspectives on Regulatory Reform," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2010), pages 25-64.
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    8. Farhi, Emmanuel & Tirole, Jean, 2008. "Competing Liquidities: Corporate Securities Real Bonds and Bubbles," IDEI Working Papers 506, Institut d'Économie Industrielle (IDEI), Toulouse.
    9. Hiroshi Ugai, "undated". "Transmission Channels and Welfare Implications of Unconventional Monetary Easing Policy in Japan," Working Papers e102, Tokyo Center for Economic Research.
    10. Stephan Luck & Paul Schempp, 2014. "Outside Liquidity, Rollover Risk, and Government Bonds," Discussion Paper Series of the Max Planck Institute for Behavioral Economics 2014_14, Max Planck Institute for Behavioral Economics.

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