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Monetary economy and budget deficit in endogenous growth model

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  • Yasuhito Tanaka

Abstract

By an endogenous growth model with two‐period overlapping generations structure and money holding of consumers, we examine the existence of budget deficit in an economy which endogenously grows by investments of firms. The main results are as follows. (1) Budget deficit is necessary for full employment under constant prices. (2) Inflation is induced if the actual budget deficit is greater than the value at which full employment is achieved under constant prices. (3) If the actual budget deficit is smaller than the value which is necessary and sufficient for full employment under constant prices, a recession occurs. Therefore, balanced budget cannot achieve full employment under constant prices. We do not assume that budget deficit must later be made up by budget surplus. This paper is an example of an analysis using a very simple model of the following statement by John Maynard Keynes. “Unemployment develops, that is to say, because people want the moon;—men cannot be employed when the object of desire (i.e. money) is something which cannot be produced and the demand for which cannot be readily choked off. There is no remedy but to persuade the public that green cheese is practically the same thing and to have a green cheese factory (i.e. a central bank) under public control.” In the appendix of this paper, we show that if money as well as goods are produced by capital and labor, budget deficit is not necessary for full employment under constant prices.

Suggested Citation

  • Yasuhito Tanaka, 2023. "Monetary economy and budget deficit in endogenous growth model," International Studies of Economics, John Wiley & Sons, vol. 18(4), pages 454-467, December.
  • Handle: RePEc:wly:intsec:v:18:y:2023:i:4:p:454-467
    DOI: 10.1002/ise3.49
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    References listed on IDEAS

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    1. Tanaka, Yasuhito, 2022. "Budget deficit in a growing monetary economy: ver. 2," MPRA Paper 115631, University Library of Munich, Germany.
    2. K. J. Arrow, 1971. "The Economic Implications of Learning by Doing," Palgrave Macmillan Books, in: F. H. Hahn (ed.), Readings in the Theory of Growth, chapter 11, pages 131-149, Palgrave Macmillan.
    3. Yakita, Akira, 2008. "Sustainability of public debt, public capital formation, and endogenous growth in an overlapping generations setting," Journal of Public Economics, Elsevier, vol. 92(3-4), pages 897-914, April.
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