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Financial Development, Institutional Quality and Maximizing-Growth Trade-Off in Government Finance

Author

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  • Alexandru Minea

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

  • Patrick Villieu

    (LEO - Laboratoire d'économie d'Orleans - UO - Université d'Orléans - CNRS - Centre National de la Recherche Scientifique)

Abstract

This paper studies monetary and fiscal policies in an endogenous growth model with transaction costs. We show that the relation between long-run economic growth and both monetary and fiscal policies is subject to threshold effects, a result that gives account of a number of recent empirical findings. Furthermore, the model shows that, to finance public expenditures, growth-maximizing governments must choose relatively high seigniorage (respectively income taxation), if "institutional quality" and "financial development" indicators are low (respectively high). Thus, our model may explain why some governments resort to seigniorage and inflationary finance, and others rather resort to high tax rates, as a result of growthmaximizing strategies in different structural environments (notably concerning institutional and financial development contexts). In addition, the model allows examining how the optimal mix of government finance changes in response to different public debt contexts. A short empirical section confirms our theoretical results.

Suggested Citation

  • Alexandru Minea & Patrick Villieu, 2010. "Financial Development, Institutional Quality and Maximizing-Growth Trade-Off in Government Finance," Post-Print hal-00488706, HAL.
  • Handle: RePEc:hal:journl:hal-00488706
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00488706
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    Cited by:

    1. Nasreddine Kaidi & Sami Mensi & Mehdi Ben Amor, 2019. "Financial Development, Institutional Quality and Poverty Reduction: Worldwide Evidence," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 141(1), pages 131-156, January.
    2. Ioannis FILIPPIDIS & Constantinos KATRAKILIDIS, 2014. "Institutions, Policy and Banking Sector Development: A Reassessment," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 64(6), pages 501-521, December.
    3. Houssem Rachdi & Sami Mensi, 2013. "Does institutions quality matter for financial development and economic growth nexus? Another look at the evidence from MENA countries," International Journal of Financial Economics, Research Academy of Social Sciences, vol. 1(1), pages 1-15.
    4. Rangan Gupta & Lardo Stander & Andrea Vaona, 2017. "Openness and Growth: Is the Relationship Non-Linear?," Working Papers 201703, University of Pretoria, Department of Economics.

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