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Inflation, volatile public spending, and endogenously sustained growth

  • Varvarigos, Dimitrios
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    I construct a model of an economy whose government finances volatile public spending via money creation. The model jointly accounts for the emergence of some well-known empirical observations. Specifically, it predicts a negative correlation between output growth and policy volatility. Furthermore, given that both the mean and the variance of the inflation rate are elevated by fluctuations in public spending, the model provides a novel theoretical justification for the simultaneous negative correlation of long-run growth with both average inflation and inflation variability. The model also supports the view that policy volatility reduces social welfare.

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    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 34 (2010)
    Issue (Month): 10 (October)
    Pages: 1893-1906

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    Handle: RePEc:eee:dyncon:v:34:y:2010:i:10:p:1893-1906
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    17. Dimitrios Varvarigos, 2007. "Policy Variability, Productive Spending and Growth," Economica, London School of Economics and Political Science, vol. 74(294), pages 299-313, 05.
    18. Judson, Ruth & Orphanides, Athanasios, 1999. "Inflation, Volatility and Growth," International Finance, Wiley Blackwell, vol. 2(1), pages 117-38, April.
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