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The macroeconomic implications of deficit financing under present bias

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  • Kim, Eungsik
  • Lee, Donghyun

Abstract

We examine how present bias affects deficit, inflation, and welfare in an economy where the deficit is funded by a seigniorage tax. In a hyperbolic discounting economy, reduced money holdings due to the desire for immediate consumption cause a decline in the sustainable deficit limit. To meet the targeted deficit, the government must raise seigniorage tax collection, especially with present bias. This results in increased inflation rates and higher welfare costs associated with the deficit for hyperbolic discounting individuals.

Suggested Citation

  • Kim, Eungsik & Lee, Donghyun, 2023. "The macroeconomic implications of deficit financing under present bias," Economics Letters, Elsevier, vol. 230(C).
    • Handle: RePEc:eee:ecolet:v:230:y:2023:i:c:s0165176523002653
    DOI: 10.1016/j.econlet.2023.111240
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    More about this item

    Keywords

    Quasi-hyperbolic discounting; Government deficit; Inflation; Welfare;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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