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Budget deficit in a growing monetary economy: ver. 2

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  • Tanaka, Yasuhito

Abstract

Using a traditional neoclassical two-period overlapping generations model that takes into account consumers’ money holdings, we examine the existence of budget deficit in an economy which grows at the constant positive rate. The following results will be shown. 1) Budget deficit is necessary to achieve full employment under constant prices of goods. 2) If the actual budget deficit is larger than the value which is necessary and sufficient for full employment under constant prices, an inflation is triggered. 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, full employment at constant prices cannot be achieved with a balanced budget. 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

  • Tanaka, Yasuhito, 2022. "Budget deficit in a growing monetary economy: ver. 2," MPRA Paper 115631, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115631
    as

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    File URL: https://mpra.ub.uni-muenchen.de/115631/1/MPRA_paper_115631.pdf
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    References listed on IDEAS

    as
    1. Masayuki Otaki, 2015. "Price Theory in a Monetary Economy," Advances in Japanese Business and Economics, in: Keynesian Economics and Price Theory, edition 127, chapter 2, pages 15-41, Springer.
    2. Otaki, Masayuki, 2007. "The dynamically extended Keynesian cross and the welfare-improving fiscal policy," Economics Letters, Elsevier, vol. 96(1), pages 23-29, July.
    3. Otaki, Masayuki, 2009. "A welfare economics foundation for the full-employment policy," Economics Letters, Elsevier, vol. 102(1), pages 1-3, January.
    4. Yasuhito Tanaka, 2020. "Involuntary unemployment with indivisible labor supply under perfect competition," Economics Bulletin, AccessEcon, vol. 40(3), pages 1914-1923.
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    Cited by:

    1. Tanaka Yasuhito, 2023. "AD-AS Analysis from the Perspective of Functional Finance Theory and MMT," Folia Oeconomica Stetinensia, Sciendo, vol. 23(1), pages 263-283, June.
    2. Ngasamiaku, Wilhelm M. & Ngong'ho, Sende, 2022. "Macroeconomic Determinants of Public Debt in Tanzania: Empirical Evidence and lessons for Post COVID-19 Recovery," African Journal of Economic Review, African Journal of Economic Review, vol. 10(5), December.
    3. 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.

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    More about this item

    Keywords

    budget deficit; economic growth; overlapping generations model;
    All these keywords.

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity

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