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Necessity of Budget Deficit Under Economic Growth in Monopolistic Competition

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  • Tanaka Yasuhito

    (Doshisha University, Kyoto, Japan)

Abstract

The aim of the paper is to show, using a simple two-period overlapping generations model in which goods are produced solely by labour in a monopolistically competitive industry, that a continuous budget deficit (including the interest payments on government bonds) is necessary to achieve and maintain full employment under economic growth driven by technological progress. Since the budget deficits must be continuous, it might be better if they were financed by seigniorage rather than government debt. Since the budget deficit due to the issuance of government bonds puts pressure on fiscal expenditures in the amount of interest payments, a budget deficit of the same size due to seigniorage is a more effective use of the budget. It will also be shown that to achieve full employment from a recession with involuntary unemployment the extra budget deficit is necessary.

Suggested Citation

  • Tanaka Yasuhito, 2022. "Necessity of Budget Deficit Under Economic Growth in Monopolistic Competition," Economics and Business, Sciendo, vol. 36(1), pages 1-16, January.
    • Handle: RePEc:vrs:ecobus:v:36:y:2022:i:1:p:1-16:n:1
    DOI: 10.2478/eb-2022-0001
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    References listed on IDEAS

    as
    1. Yasuhito Tanaka, 2022. "Debt to GDP Ratio from the Perspective of MMT with a Simple Microeconomic Foundation," Journal of Social Science Studies, Macrothink Institute, vol. 9(2), pages 1-1, December.
    2. L. Randall Wray, 2015. "Modern Money Theory," Palgrave Macmillan Books, Palgrave Macmillan, edition 2, number 978-1-137-53992-2, December.
    3. Yasuhito Tanaka, 2020. "Involuntary unemployment with indivisible labor supply under perfect competition," Economics Bulletin, AccessEcon, vol. 40(3), pages 1914-1923.
    4. Yasuhito Tanaka, 2022. "Debt to GDP Ratio from the Perspective of MMT," Business Management and Strategy, Macrothink Institute, vol. 13(1), pages 1-12, June.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Budget deficit; Economic growth; Government bonds; Overlapping generations model; Seigniorage;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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