Premium
Fiscal and Monetary Policy Interactions in an Endogenous Growth Model With Financial Intermediaries
Author(s) -
EspinosaVega Marco A.,
Yip Chong K.
Publication year - 1999
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.00030
Subject(s) - seigniorage , economics , financial intermediary , monetary economics , endogenous growth theory , inflation (cosmology) , monetary policy , risk aversion (psychology) , fiscal policy , macroeconomics , financial economics , expected utility hypothesis , human capital , market economy , physics , theoretical physics
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 à la Tobin can be observed.