Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system

摘要

We extend the [Barro, R., 1990. Government spending in a simple model of economic growth. Journal of Political Economy 98, 103-125] model to money financing of public expenditures, in a setup where money demand is motivated by a "transaction cost" technology, exhibiting the "cash-in-advance" specification as a special case, in the spirit of [Palivos, T., Yip, C, 1995. Government expenditure financing in an endogenous growth model: a comparison. Journal of Money, Credit and Banking 27, 1159-1178]. Allowing for productive public spending yields threshold effects between long-run growth and both income taxation and seigniorage, thus reproducing recent stylized facts. Moreover, in the cash-in-advance special case, we show that, to maximize long-run growth and/or welfare, government must use seigniorage-only or taxes only, depending on parameters, and in particular on the degree of financial development. In contrast, the general form of money demand motivated by a "transaction cost" technology producesinterior solutions in which both seigniorage and taxes are used. An empirical section confirms our theoretical results. The endogenous growth theory has provided several interesting results about the impact of fiscal and monetary policies on long-run economic growth. Concerning fiscal policy, standard endogenous growth models show the existence of a threshold in the taxes to long-run growth relation, in link with the pioneer work of Barro (1990). Concerning monetary policy, most of theoretical results in endogenous growth models (e.g. Alogoskoufis and van der Ploeg, 1991; Wang and Yip, 1992; Jones and Manuelli, 1993; Palivos and Yip, 1995) conclude that it is harmful or at best neutral in the long-run, as in exogenous growth models.