IDEAS home Printed from https://ideas.repec.org/a/ier/iecrev/v40y1999i3p595-615.html
   My bibliography  Save this article

Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries

Author

Listed:
  • Espinosa-Vega, Marco A
  • Yip, Chong K

Abstract

This paper presents a framework that can help reconcile conflicting findings in the growth-inflation literature. Here, the behavior of financial intermediaries plays a crucial role in the determination of the economy's inflation and real growth rates. Absent any restrictions on financial intermediation, there will be a unique equilibrium when agents are fairly risk averse. In this case, an increase in seigniorage-financed government spending will always be inflationary and detrimental to growth. When agents exhibit a low degree of risk aversion, multiple equilibria emerge and a positive relation between inflation and growth a la Tobin can be observed. Copyright 1999 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Suggested Citation

  • Espinosa-Vega, Marco A & Yip, Chong K, 1999. "Fiscal and Monetary Policy Interactions in an Endogenous Growth Model with Financial Intermediaries," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 40(3), pages 595-615, August.
    • Handle: RePEc:ier:iecrev:v:40:y:1999:i:3:p:595-615
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Romer, Paul M, 1986. "Increasing Returns and Long-run Growth," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 1002-1037, October.
    2. Valerie R. Bencivenga & Bruce D. Smith, 1991. "Financial Intermediation and Endogenous Growth," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 195-209.
    3. Palivos, Theodore & Yip, Chong K, 1995. "Government Expenditure Financing in an Endogenous Growth Model: A Comparison," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1159-1178, November.
    4. Jones, Larry E. & Manuelli, Rodolfo E., 1995. "Growth and the effects of inflation," Journal of Economic Dynamics and Control, Elsevier, vol. 19(8), pages 1405-1428, November.
    5. Stephen D. Williamson, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(1), pages 135-145.
    6. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
    7. Townsend, Robert M, 1987. "Economic Organization with Limited Communication," American Economic Review, American Economic Association, vol. 77(5), pages 954-971, December.
    8. Bencivenga, Valerie R & Smith, Bruce D, 1992. "Deficits, Inflation, and the Banking System in Developing Countries: The Optimal Degree of Financial Repression," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 767-790, October.
    9. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    10. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    11. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    12. Bruce Champ & Bruce D. Smith & Stephen D. Williamson, 1996. "Currency Elasticity and Banking Panics: Theory and Evidence," Canadian Journal of Economics, Canadian Economics Association, vol. 29(4), pages 828-864, November.
    13. Roubini, Nouriel & Sala-i-Martin, Xavier, 1992. "Financial repression and economic growth," Journal of Development Economics, Elsevier, vol. 39(1), pages 5-30, July.
    14. Marco A. Espinosa-Vega & Chong K. Yip, 1996. "An endogenous growth model of money, banking, and financial repression," FRB Atlanta Working Paper 96-4, Federal Reserve Bank of Atlanta.
    15. Vito Tanzi, 1977. "Inflation, Lags in Collection, and the Real Value of Tax Revenue (L'inflation, les retards de recouvrement et la valeur réelle des recettes fiscales) (Inflación, desfases en la recaudación y valor ," IMF Staff Papers, Palgrave Macmillan, vol. 24(1), pages 154-167, March.
    16. repec:bla:econom:v:59:y:1992:i:234:p:235-52 is not listed on IDEAS
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Juin-Jen Chang & Wen-Ya Chang & Ching-Chong Lai & Ping Wang, 2007. "Equilibrium Dynamics in an Endogenous Growth Model of Money and Banking," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(7), pages 1683-1710, October.
    2. Niloy Bose & Jill A. Holman & Kyriakos C. Neanidis, 2007. "The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 433-452, July.
    3. Hernando Vargas H., 1996. "Apertura, encajes e intermediación financiera," Revista ESPE - Ensayos sobre Política Económica, Banco de la Republica de Colombia, vol. 15(30), pages 5-40, December.
    4. Ghosh Sugata & Neanidis Kyriakos C., 2017. "Corruption, fiscal policy, and growth: a unified approach," The B.E. Journal of Macroeconomics, De Gruyter, vol. 17(2), pages 1-24, June.
    5. Jan Frait & Luboš Komárek, 2006. "Půlstoletí vývoje světových peněz [Half a century of the world money development]," Politická ekonomie, Prague University of Economics and Business, vol. 2006(3), pages 307-325.
    6. Rangan Gupta, 2005. "Costly State Monitoring and Reserve Requirements," Annals of Economics and Finance, Society for AEF, vol. 6(2), pages 263-288, November.
    7. Barnett, Richard C., 2005. "Coordinating macroeconomic policy in a simple AK growth model," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 621-647, December.
    8. Tetsuo Ono, 2020. "Fiscal rules in a monetary economy: Implications for growth and welfare," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(1), pages 190-219, February.
    9. Lu Chia-Hui & Chen Been-Lon & Hsu Mei, 2011. "The Dynamic Relationship between Inflation and Output Growth in a Cash-Constrained Economy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-29, May.
    10. Wai-Ming Ho & Jinli Zeng & Jie Zhang, 2007. "Inflation Taxation and Welfare with Externalities and Leisure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 105-131, February.
    11. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Corruption, Seigniorage and Growth: Theory and Evidence," CESifo Working Paper Series 2354, CESifo.
    12. Holman, Jill A. & Neanidis, Kyriakos C., 2006. "Financing government expenditures in an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(8), pages 1315-1337, August.
    13. Gaetano Antinolfi & Claudia M. Landeo & Maxim Nikitin, 2007. "Dollarization and the inflation threshold," Canadian Journal of Economics, Canadian Economics Association, vol. 40(2), pages 628-649, May.
    14. Rangan Gupta, 2011. "Currency Substitution and Financial Repression," International Economic Journal, Taylor & Francis Journals, vol. 25(1), pages 47-61.
    15. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    16. Powers, Dennis, 2005. "Inside money and the effects of inflation," Journal of Macroeconomics, Elsevier, vol. 27(3), pages 494-516, September.
    17. Keith Blackburn & Kyriakos C. Neanidis & M. Emranul Haque, 2008. "Comparing Seasonal Forecasts of Industrial Production," Centre for Growth and Business Cycle Research Discussion Paper Series 103, Economics, The University of Manchester.
    18. Hung, Fu-Sheng, 2005. "Optimal composition of government public capital financing," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 704-723, December.
    19. Rangan Gupta, 2011. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 65-87, May.
    20. Hung, Fu-Sheng, 2003. "Inflation, financial development, and economic growth," International Review of Economics & Finance, Elsevier, vol. 12(1), pages 45-67.
    21. John Duffy & Maxim Nikitin, 2004. "Dollarization Traps," Econometric Society 2004 Latin American Meetings 196, Econometric Society.
    22. Fu-Sheng Hung, 2001. "Fiscal, Monetary, and Reserve Requirement Policy in an Endogenous Growth with Financial Market Imperfections," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 26(1), pages 61-82, June.
    23. Jill A. Holman, 2000. "Government budgetary policies, economic growth, and currency substitution in a small open economy," Research Working Paper RWP 00-08, Federal Reserve Bank of Kansas City.
    24. Muhammad Iftikhar ul Husnain, 2010. "Expenditure-Growth Nexus: Does the Source of Finance Matter? Empirical Evidence from Selected South Asian Countries," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 49(4), pages 631-640.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rangan Gupta & Philton Makena, 2020. "Growth Dynamics, Multiple Equilibria, and Local Indeterminacy in an Endogenous Growth Model of Money, Banking and Inflation Targeting," Economies, MDPI, vol. 8(1), pages 1-14, March.
    2. Beatrix Paal & Bruce D. Smith, 2013. "The sub-optimality of the Friedman rule and the optimum quantity of money," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 911-948, November.
    3. Niloy Bose & Jill A. Holman & Kyriakos C. Neanidis, 2007. "The Optimal Public Expenditure Financing Policy: Does The Level Of Economic Development Matter?," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 433-452, July.
    4. repec:cuf:journl:y:2013:v:14:i:3:paal is not listed on IDEAS
    5. Joseph H. Haslag & Jahyeong Koo, 1999. "Financial repression, financial development and economic growth," Working Papers 9902, Federal Reserve Bank of Dallas.
    6. Edgar A. Ghossoub, 2013. "Banking Competition: Implications for Welfare and Monetary Policy," Working Papers 0182eco, College of Business, University of Texas at San Antonio.
    7. Jones, Larry E. & Manuelli, Rodolfo E., 1997. "The sources of growth," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 75-114, January.
    8. Greenwood, Jeremy & Smith, Bruce D., 1997. "Financial markets in development, and the development of financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 145-181, January.
    9. Hung, Fu-Sheng, 2005. "Optimal composition of government public capital financing," Journal of Macroeconomics, Elsevier, vol. 27(4), pages 704-723, December.
    10. Alan M. Taylor, 1995. "Growth and Convergence in the Asia-Pacific Region: On the Role of Openness, Trade and Migration," NBER Working Papers 5276, National Bureau of Economic Research, Inc.
    11. TRABELSI, Mohammed, 2002. "Finance and Growth : Empirical Evidence from Developing Countries, 1960-1990," Cahiers de recherche 2002-13, Universite de Montreal, Departement de sciences economiques.
    12. Edgar A. Ghossoub & Robert R. Reed, 2019. "Banking competition, production externalities, and the effects of monetary policy," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(1), pages 91-154, February.
    13. Chang, Chia-Ying, 2012. "When banking systems meet currencies," Working Paper Series 18620, Victoria University of Wellington, School of Economics and Finance.
    14. Turnovsky, S., 2000. "Growth in an Open Economy: some Recent Developments," Papers 5, Warwick - Development Economics Research Centre.
    15. Sefa Awaworyi Churchill & Mehmet Ugur & Siew Ling Yew, 2017. "Does Government Size Affect Per-Capita Income Growth? A Hierarchical Meta-Regression Analysis," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 142-171, March.
    16. Laurent Cavenaile & Christian Gengenbach & Franz Palm, 2014. "Stock Markets, Banks and Long Run Economic Growth: A Panel Cointegration-Based Analysis," De Economist, Springer, vol. 162(1), pages 19-40, March.
    17. Obstfeld, Maurice, 1994. "Risk-Taking, Global Diversification, and Growth," American Economic Review, American Economic Association, vol. 84(5), pages 1310-1329, December.
    18. Bhattacharya, Joydeep & Haslag, Joseph H. & Martin, Antoine, 2009. "Why does overnight liquidity cost more than intraday liquidity?," Journal of Economic Dynamics and Control, Elsevier, vol. 33(6), pages 1236-1246, June.
    19. Razzak, Weshah, 2017. "International Productivity Growth Differentials Sectoral Analysis and Missing Productivity," MPRA Paper 84967, University Library of Munich, Germany, revised 06 Mar 2018.
    20. Smith, Bruce D & Weber, Warren E, 1999. "Private Money Creation and the Suffolk Banking System," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(3), pages 624-659, August.
    21. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ier:iecrev:v:40:y:1999:i:3:p:595-615. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley-Blackwell Digital Licensing or the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/deupaus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.