Fiscal and Monetary Policy in a Basic Endogenous Growth Model

23 Pages Posted: 14 Mar 2013

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: March 13, 2013

Abstract

We present a monetary endogenous growth model and analyze the effects of fiscal and monetary policy with real money as an argument in the utility function. We show that a balanced government budget gives a higher balanced growth rate and lower inflation than a situation with permanent public deficits. It also leads to higher welfare compared to a situation with permanent deficits where the government does not put a high weight on stabilizing debt. However, when governments run deficits with a high weight on stabilizing debt, comparative welfare effects depend on the initial conditions with respect to public debt. Further, for a given monetary policy a stricter debt policy yields higher growth, lower inflation and higher welfare. A rise in the nominal money supply can compensate the negative growh effects of a loose debt policy up to a certain point but only at the cost of higher inflation and lower welfare.

Keywords: Public debt, monetary policy, inter-temporal budget constraint, economic growth

JEL Classification: H63, E62, E52, O42

Suggested Citation

Greiner, Alfred, Fiscal and Monetary Policy in a Basic Endogenous Growth Model (March 13, 2013). Bielefeld Working Papers in Economics and Management No. 10-2013. Available at SSRN: https://ssrn.com/abstract=2232737 or http://dx.doi.org/10.2139/ssrn.2232737

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, 33501
Germany
+49 521 106 4859 (Phone)
+49 521 106 67120 (Fax)

HOME PAGE: http://phoenix.wiwi.uni-bielefeld.de/lehrbereiche/vwl/wipol

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