Government Financing in an Endogenous Growth Model with Financial Market Restrictions

FRB Atlanta Working Paper No. 2000-17

31 Pages Posted: 28 Dec 2000

See all articles by Marco A. Espinosa-Vega

Marco A. Espinosa-Vega

International Monetary Fund (IMF)

Chong Kee Yip

The Chinese University of Hong Kong (CUHK) - Department of Economics

Date Written: October 2000

Abstract

In this paper we develop an endogenous growth model with market regulations on explicitly modeled financial intermediaries to examine the effects of alternative government financing schemes on growth, inflation, and welfare. We find that in the presence of binding legal reserve requirements, a marginal increase in government spending need not result in a reduction in the rate of economic growth if it is financed with an increase in the seigniorage tax rate. Raising the seigniorage tax base by means of an increase in the reserve requirement retards growth and has an ambiguous effect on inflation. An increase in income tax?financed government spending also suppresses growth and raises inflation although not to the extent that the required seigniorage tax rate alternative would. Switching from seigniorage to income taxation as a source of government finance is growth-reducing but deflationary. From a welfare perspective, the least distortionary way of financing an increase in the government spending requirements is by means of a marginal increase in the seigniorage tax rate. Finally, under the specification of logarithmic preferences, the optimal tax structure is indeterminate.

Key words: government financing, endogenous growth, financial intermediaries

JEL Classification: E62, E44, O42

Suggested Citation

Espinosa-Vega, Marco A. and Yip, Chong Kee, Government Financing in an Endogenous Growth Model with Financial Market Restrictions (October 2000). FRB Atlanta Working Paper No. 2000-17. Available at SSRN: https://ssrn.com/abstract=248061 or http://dx.doi.org/10.2139/ssrn.248061

Marco A. Espinosa-Vega (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8589 (Phone)
202-623-4311 (Fax)

Chong Kee Yip

The Chinese University of Hong Kong (CUHK) - Department of Economics ( email )

Shatin, N.T.
Hong Kong
+852 2609-7057 (Phone)
+852 2603-5805 (Fax)

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