Fiscal and Monetary Policies and Economic Growth

Abstract

The paper analyses the way in which monetary and fiscal policy influences the performances of economic growth. The analysis is made on the basis of a dynamic model with discrete variables of the Sidrauski- Brock type, with infinite-lived households and money in the utility function. The model is with a representative private agent and a government sector consisting of a consolidated fiscal authority and central bank. Households receive an exogenous perishable endowment each period, decide about consumption and pay net real lump-sum tax.

The state variable of the model is government debt, and the decision variables are: consumption and the amount of money detained by the agent.

The optimality conditions are obtained by using the Maximum Principle for discrete dynamic systems. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variable and the properties of the Lagrange multipliers.

Finally, we analyze the influence of several monetary and fiscal decisions on the optimal trajectories and on the performance-function of the model.

Keywords: Economic Growth, Monetary Policy, Fiscal Policy, Fiscal Solvency

JEL Classification: C61, D99, E31, E41, E62, E63, H62, H63, O4