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

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  • Minea, Alexandru
  • Villieu, Patrick

Abstract

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 produces interior solutions in which both seigniorage and taxes are used. An empirical section confirms our theoretical results.

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  • Minea, Alexandru & Villieu, Patrick, 2009. "Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 304-319, June.
    • Handle: RePEc:eee:jmacro:v:31:y:2009:i:2:p:304-319
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    1. Minea, Alexandru & Villieu, Patrick, 2009. "Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 304-319, June.
    2. Eleftherios Goulas & Athina Zervoyianni, 2012. "Growth, Deficits and Uncertainty in a Panel of 28 Countries," Working Paper series 52_12, Rimini Centre for Economic Analysis.
    3. Alexandru MINEA & Hélène EHRHART & Patrick VILLIEU, 2009. "Deficit, Seigniorage and the Growth Laffer Curve in developing countries," Working Papers 200926, CERDI.
    4. Jean-Louis COMBES & Pascale COMBES MOTEL & Alexandru MINEA & Patrick VILLIEU, 2010. "Disinflation against the Environment? An application to the trade-off between seigniorage and deforestation," Working Papers 201014, CERDI.
    5. Ehrhart, Hélène & Minea, Alexandru & Villieu, Patrick, 2014. "Debt, seigniorage, and the Growth Laffer Curve in developing countries," Journal of Macroeconomics, Elsevier, vol. 42(C), pages 199-210.
    6. Eleftherios Goulas & Athina Zervoyianni, 2013. "Growth, Deficits and Uncertainty: Theoretical Aspects and Empirical Evidence," Working Paper series 53_13, Rimini Centre for Economic Analysis.
    7. Apeti, Ablam Estel & Combes, Jean-Louis & Minea, Alexandru, 2023. "Inflation targeting and the composition of public expenditure: Evidence from developing countries," Journal of Macroeconomics, Elsevier, vol. 76(C).
    8. Minea, Alexandru & Villieu, Patrick, 2010. "Financial development, institutional quality and maximizing-growth trade-off in government finance," Economic Modelling, Elsevier, vol. 27(1), pages 324-335, January.
    9. Yannick Lucotte, 2010. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," Post-Print halshs-00505140, HAL.
    10. Réda Marakbi & Patrick Villieu, 2020. "Corruption, tax evasion, and seigniorage in a monetary endogenous growth model," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(6), pages 2019-2050, December.
    11. Alexandru Minea & Patrick Villieu, 2009. "Impôt, déficit et croissance économique : un réexamen de la courbe de Laffer," Revue d'économie politique, Dalloz, vol. 119(4), pages 653-675.
    12. Goulas, Eleftherios & Zervoyianni, Athina, 2013. "Growth, deficits and uncertainty: Theoretical aspects and empirical evidence from a panel of 27 countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(4), pages 380-392.
    13. Lucotte, Yannick, 2010. "Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation," MPRA Paper 23871, University Library of Munich, Germany.

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