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Fiscal and monetary policy interactions in an endogenous growth model with financial intermediaries

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  • Marco A. Espinosa-Vega
  • Chong K. Yip

Abstract

We review some inflationary and growth claims surrounding fiscal and monetary policy interactions. While financial intermediation has long been acknowledged as a key mechanism in the transmission of these interactions, only recently have economists incorporated the explicit modeling of such intermediaries in their analyses. Here we model financial intermediaries explicitly. We find that the relation between growth and inflation depends crucially on the agents' degree of relative risk aversion. Moreover, the degree of relative risk aversion also plays a significant role in the existence and uniqueness of the balanced growth equilibrium. ; Another important contribution of the current paper is its investigation into the effects of different government financing methods on economic growth and welfare.

Suggested Citation

  • Marco A. Espinosa-Vega & Chong K. Yip, 1995. "Fiscal and monetary policy interactions in an endogenous growth model with financial intermediaries," FRB Atlanta Working Paper 95-10, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:95-10
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    Cited by:

    1. Rangan Gupta, 2011. "Currency Substitution and Financial Repression," International Economic Journal, Taylor & Francis Journals, vol. 25(1), pages 47-61.
    2. Juin-Jen Chang & Wen-Ya Chang & Ching-Chong Lai & Ping Wang, 2007. "Equilibrium Dynamics in an Endogenous Growth Model of Money and Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1683-1710, October.
    3. Niloy Bose & Jill A. Holman & Kyriakos C. Neanidis, 2007. "The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 433-452, July.
    4. Hernando Vargas H., 1996. "Apertura, encajes e intermediación financiera," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 15(30), pages 5-40, December.
    5. Ghosh Sugata & Neanidis Kyriakos C., 2017. "Corruption, fiscal policy, and growth: a unified approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-24, June.
    6. Hung, Fu-Sheng, 2003. "Inflation, financial development, and economic growth," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 45-67.
    7. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
    8. Barnett, Richard C., 2005. "Coordinating macroeconomic policy in a simple AK growth model," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 621-647, December.
    9. Tetsuo Ono, 2020. "Fiscal rules in a monetary economy: Implications for growth and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(1), pages 190-219, February.
    10. Lu Chia-Hui & Chen Been-Lon & Hsu Mei, 2011. "The Dynamic Relationship between Inflation and Output Growth in a Cash-Constrained Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-29, May.
    11. Wai‐Ming Ho & Jinli Zeng & Jie Zhang, 2007. "Inflation Taxation and Welfare with Externalities and Leisure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 105-131, February.
    12. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series 2354, CESifo.
    13. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    14. Holman, Jill A. & Neanidis, Kyriakos C., 2006. "Financing government expenditures in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1315-1337, August.
    15. Gaetano Antinolfi & Claudia M. Landeo & Maxim Nikitin, 2007. "Dollarization and the inflation threshold," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 628-649, May.
    16. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    17. Powers, Dennis, 2005. "Inside money and the effects of inflation," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 494-516, September.
    18. Rangan Gupta, 2011. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 65-87, May.
    19. Hung, Fu-Sheng, 2005. "Optimal composition of government public capital financing," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 704-723, December.
    20. Jill A. Holman, 2000. "Government budgetary policies, economic growth, and currency substitution in a small open economy," Research Working Paper RWP 00-08, Federal Reserve Bank of Kansas City.
    21. Muhammad Iftikhar ul Husnain, 2010. "Expenditure-Growth Nexus: Does the Source of Finance Matter? Empirical Evidence from Selected South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 631-640.

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    Keywords

    Fiscal policy; Monetary policy;

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