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

Marco A. Espinosa and Chong K. Yip
Federal Reserve Bank of Atlanta
Working Paper 95-10
November 1995

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We review some inflationary and growth claims surrounding fiscal and monetary policy interactions. While financial intermediation has long been acknowledged as a key mechanism in the transmission of these interactions, only recently have economists incorporated the explicit modeling of such intermediaries in their analyses. Here we model financial intermediaries explicitly. We find that the relation between growth and inflation depends crucially on the agents' degree of relative risk aversion. Moreover, the degree of relative risk aversion also plays a significant role in the existence and uniqueness of the balanced growth equilibrium.

Another important contribution of the current paper is its investigation into the effects of different government financing methods on economic growth and welfare.

JEL classification: E44, 016, 042