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Fiscal and Monetary Policy in a Basic Endogenous Growth Model

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  • Alfred Greiner

Abstract

We present a monetary endogenous growth model and analyse the effects of fiscal and monetary policy with real money as an argument in the utility function. We show that a balanced government budget gives a higher balanced growth rate and lower inflation than a situation with permanent public deficits. It also leads to higher welfare compared to a situation with permanent deficits when the government does not put a high weight on stabilizing debt. However, when governments run deficits with a high weight on stabilizing debt, comparative welfare effects depend on the initial conditions with respect to public debt. Further, for a given monetary policy a stricter debt policy yields higher growth, lower inflation and higher welfare. A rise in the nominal money supply can compensate the negative growth effects of a loose debt policy up to a certain point but only at the cost of higher inflation and lower welfare. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Alfred Greiner, 2015. "Fiscal and Monetary Policy in a Basic Endogenous Growth Model," Computational Economics, Springer;Society for Computational Economics, vol. 45(2), pages 285-301, February.
    • Handle: RePEc:kap:compec:v:45:y:2015:i:2:p:285-301
    DOI: 10.1007/s10614-014-9421-3
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    More about this item

    Keywords

    Public debt; Monetary policy; Inter-temporal budget constraint; Economic growth; H63; E62; E52; O42;
    All these keywords.

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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