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Fiscal, Monetary, and Financial Interactions in Dynamic General Equilibrium


  • Strulik, Holger


This paper proposes a model that links households and firms, as usual, by markets for factors and goods and, additionally, by a banking sector that channels households' funds to firms and eliminates idiosyncratic risk. In equilibrium, agency costs and tax benefits of corporate debt are equalizing each other, which renders an institutionally based explanation of financial structure. Adjustment of corporate finance adds to the ordinary savings channel of fiscal and monetary policy. Taking real and financial interactions into account, the model predicts a somewhat lower impact of fiscal policy on macroeconomic aggregates as commonly assessed and a much stronger impact of monetary policy. This amplification is caused by the banking sector's translation of borrowing rates into lending rates and vice versa.

Suggested Citation

  • Strulik, Holger, 2008. "Fiscal, Monetary, and Financial Interactions in Dynamic General Equilibrium," Hannover Economic Papers (HEP) dp-402, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  • Handle: RePEc:han:dpaper:dp-402

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    References listed on IDEAS

    1. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
    2. Dalgaard, Carl-Johan & Strulik, Holger, 2007. "A Bioeconomic Foundation of the Malthusian Equilibrium: Body Size and Population Size in the Long-Run," Hannover Economic Papers (HEP) dp-373, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Ben-David, Dan, 1998. "Convergence clubs and subsistence economies," Journal of Development Economics, Elsevier, vol. 55(1), pages 155-171, February.
    4. Steger, Thomas M., 2000. "Economic growth with subsistence consumption," Journal of Development Economics, Elsevier, vol. 62(2), pages 343-361, August.
    5. Ngo Long & Gerhard Sorger, 2006. "Insecure property rights and growth: the role of appropriation costs, wealth effects, and heterogeneity," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(3), pages 513-529, August.
    6. Lucas, Robert E, Jr, 1990. "Supply-Side Economics: An Analytical Review," Oxford Economic Papers, Oxford University Press, vol. 42(2), pages 293-316, April.
    7. Masao Ogaki & Jonathan D. Ostry & Carmen M. Reinhart, 1996. "Saving Behavior in Low- and Middle-Income Developing Countries: A Comparison," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 38-71, March.
    8. Daron Acemoglu & Simon Johnson & James A. Robinson, 2001. "The Colonial Origins of Comparative Development: An Empirical Investigation," American Economic Review, American Economic Association, vol. 91(5), pages 1369-1401, December.
    9. Reinhart, Carmen & Ogaki, Masao & Ostry, Jonathan, 1995. "Saving behavior in low- and middle-income developing countries," MPRA Paper 13757, University Library of Munich, Germany.
    10. Mino, Kazuo, 2006. "Voracity vs. scale effect in a growing economy without secure property rights," Economics Letters, Elsevier, vol. 93(2), pages 278-284, November.
    11. Philip R. Lane & Aaron Tornell, 1999. "The Voracity Effect," American Economic Review, American Economic Association, vol. 89(1), pages 22-46, March.
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    More about this item


    Fiscal Policy; Monetary Policy; Corporate Finance; Agency Costs; Banking; Economic Growth; Business Cycles.;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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