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

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

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.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 95-10.

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Date of creation: 1995
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Publication status: Published in International Economic Review, August 1999
Handle: RePEc:fip:fedawp:95-10
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  1. Stacey L. Schreft & Bruce D. Smith, 1994. "Money, banking, and capital formation," Working Paper 94-05, Federal Reserve Bank of Richmond.
  2. Champ, B. & Snith, B.D. & Williamson, D.S., 1991. "Currency Elasticity and Banking Panics: Theory and Evidence," RCER Working Papers 292, University of Rochester - Center for Economic Research (RCER).
  3. Sergio T. Rebelo, 1990. "Long Run Policy Analysis and Long Run Growth," NBER Working Papers 3325, National Bureau of Economic Research, Inc.
  4. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 102(1), pages 135-145.
  5. Nouriel Roubini & Xavier Sala-i-Martin, 1991. "Financial Repression and Economic Growth," NBER Working Papers 3876, National Bureau of Economic Research, Inc.
  6. Larry E. Jones & Rodolfo E. Manuelli, 1993. "Growth and the Effects of Inflation," NBER Working Papers 4523, National Bureau of Economic Research, Inc.
  7. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-71, December.
  8. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-90, October.
  9. Barro, R.J., 1988. "Government Spending In A Simple Model Of Endogenous Growth," RCER Working Papers 130, University of Rochester - Center for Economic Research (RCER).
  10. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  11. Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur réelle des recettes fiscales) (Inflación, desfases en la recaudación y valor ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
  12. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-37, October.
  13. Bencivenga, V.R. & Smith, B.D., 1988. "Financial Intermediation And Endogenous Growth," RCER Working Papers 124, University of Rochester - Center for Economic Research (RCER).
  14. Palivos, Theodore & Yip, Chong K, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1159-78, November.
  15. Marco A. Espinosa-Vega & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," FRB Atlanta Working Paper 96-4, Federal Reserve Bank of Atlanta.
  16. Turnovsky, Stephen J, 1992. "Alternative Forms of Government Expenditure Financing: A Comparative Welfare Analysis," Economica, London School of Economics and Political Science, vol. 59(234), pages 235-52, May.
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