Government Expenditure Financing in an Endogenous Growth Model: A Comparison

Theodore Palivos · Chong Kee Yip

83 citations0/0 files storedJournal of money credit and banking

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Fiscal Policy and Economic Growth Monetary Policy and Economic Impact Economic theories and models

Abstract

This paper develops a generalized cash-in-advance model of endogenous growth to assess the relative merits of money and income-tax financing of a constant share of government expenditure in GNP. The authors find that money financing (seigniorage) leads to higher growth and inflation rates, pointing out to a trade-off between growth and inflation. Nevertheless, they also find that the financing policy that maximizes welfare is, in general, a mix of the two methods, with the weights depending crucially on the fraction of investment purchases that are subject to the cash-in-advance constraint. Copyright 1995 by Ohio State University Press.

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