Optimal Financing by Money and Taxes of Productive and Unproductive Government Spending: Effects on Economic Growth, Inflation, and Welfare
This paper contains an investigation of the effects of different means of financing government spending on economic growth, inflation, and welfare. In this setting, two different types of government spending are considered: productive expenditures which provide services to the private sector in its production activities; and unproductive expenditures which have no direct influence on the private economy. In turn, two different forms of finance are considered: proportional income taxation; and money creation. The primary result of the paper is, perhaps, striking in its simplicity. Specifically, we find that optimal public finance requires productive government to be financed by money creation and unproductive government expenditure by income taxation. Within the model structure–a representative agent, endogenous growth model with money introduced via a cash-in-advance constraint–the basic result is robust to changes in value of all underlying model parameters such as the intertemporal elasticity of substitution in consumption, the rate of time preference, and the output elasticity of public services. The paper proceeds as follows. Section II contains a brief description of the model. Section III presents the economic equilibrium, while Sections IV and V compare the effects of financing productive and unproductive expenditures, respectively, by taxation and money creation. Section VI brings together the previous sections considers the joint financing of government expenditures by taxation and money creation. Section VII concludes the paper and points to directions for future research.
(This abstract was borrowed from another version of this item.)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Barro, Robert J., 1990.
"Government Spending in a Simple Model of Endogeneous Growth,"
3451296, Harvard University Department of Economics.
- Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages S103-26, October.
- Robert J. Barro, 1988. "Government Spending in a Simple Model of Endogenous Growth," NBER Working Papers 2588, National Bureau of Economic Research, Inc.
- 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).
- David Alan Aschauer, 2000.
"Do states optimize? Public capital and economic growth,"
The Annals of Regional Science,
Springer;Western Regional Science Association, vol. 34(3), pages 343-363.
- David Alan Aschauer, 1997. "Do States Optimize? Public Capital and Economic Growth," Macroeconomics 9711007, EconWPA.
- David Alan Aschauer, 1997. "Do States Optimize?: Public Capital and Economic Growth," Economics Working Paper Archive wp_189, Levy Economics Institute.
- Paul M Romer, 1999.
"Increasing Returns and Long-Run Growth,"
Levine's Working Paper Archive
2232, David K. Levine.
- Evans, Paul & Karras, Georgios, 1994. "Are Government Activities Productive? Evidence from a Panel of U.S. States," The Review of Economics and Statistics, MIT Press, vol. 76(1), pages 1-11, February.
- Robert J. Barro, 1998.
"Determinants of Economic Growth: A Cross-Country Empirical Study,"
MIT Press Books,
The MIT Press,
edition 1, volume 1, number 0262522543.
- Robert J. Barro, 1996. "Determinants of Economic Growth: A Cross-Country Empirical Study," NBER Working Papers 5698, National Bureau of Economic Research, Inc.
- 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.
- Theodore Palivos & Chong K. Yip, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Departmental Working Papers _057, Chinese University of Hong Kong, Department of Economics.
- Theodore Palivos & Chong K. Yip, 1994. "Government expenditure financing in an endogenous growth model: a comparison," FRB Atlanta Working Paper 94-1, Federal Reserve Bank of Atlanta.
- N. Gregory Mankiw & David Romer & David N. Weil, 1992.
"A Contribution to the Empirics of Economic Growth,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 107(2), pages 407-437.
- Lynde, Catherine & Richmond, J, 1993. "Public Capital and Total Factor Productivity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(2), pages 401-14, May.
- Gerald P. Dwyer & R. W. Hafer, 1988. "Is money irrelevant?," Review, Federal Reserve Bank of St. Louis, issue May, pages 3-17.
- Mary G. Finn, 1993. "Is all government capital productive?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 53-80.
- Turnovsky, Stephen J. & Fisher, Walter H., 1995. "The composition of government expenditure and its consequences for macroeconomic performance," Journal of Economic Dynamics and Control, Elsevier, vol. 19(4), pages 747-786, May.
- Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
- Stockman, Alan C., 1981. "Anticipated inflation and the capital stock in a cash in-advance economy," Journal of Monetary Economics, Elsevier, vol. 8(3), pages 387-393.
When requesting a correction, please mention this item's handle: RePEc:lev:wrkpap:wp_241. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marie-Celeste Edwards)
If references are entirely missing, you can add them using this form.