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Economic growth and income inequality: The role of fiscal and monetary policy

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  • Daisuke Miyashita

    (The University of Kitakyushu)

Abstract

In this paper, we develop a monetary endogenous growth model with heterogeneity of initial asset holdings and examine the relationships among fiscal and monetary policy, economic growth, and wealth and income inequality. We incorporate a flexible labor supply and money-in-the-utility approach to accomplish this. The origin of income inequality is heterogeneous endowments of initial assets, and this heterogeneity impacts both economic growth and income inequality through labor supply and real money holdings. In this model, the government-debt-to-private-capital ratio, government-debt-to-real-money-balance ratio, and average leisure determine the rate of asset return and the wage rate, which affect the economic growth rate and distribution across agents. By conducting a numerical simulation, we find a negative relationship between the economic growth rate and income inequality in the long term with strict fiscal discipline. Moreover, with the increasing money growth rate, we see a positive relationship between the economic growth rate and income inequality in the long term.

Suggested Citation

  • Daisuke Miyashita, 2025. "Economic growth and income inequality: The role of fiscal and monetary policy," Portuguese Economic Journal, Springer;Instituto Superior de Economia e Gestao, vol. 24(2), pages 171-204, May.
    • Handle: RePEc:spr:portec:v:24:y:2025:i:2:d:10.1007_s10258-024-00267-4
    DOI: 10.1007/s10258-024-00267-4
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    More about this item

    Keywords

    Economic growth; Fiscal and monetary policy; Income inequality; Labor-leisure choice;
    All these keywords.

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • O42 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Monetary Growth Models

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