Deficit, monetization, and economic growth: a case for multiplicity and indeterminacy
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This paper develops an original analysis of deficit monetization in a growth model with transaction costs, in which economic growth interacts with productive public expenditures. This interaction generates two positive balanced growth paths (BGP) in the long run: a high BGP and a low BGP. The transitional dynamics show that multiplicity cannot be rejected if transaction costs affect both consumption and investment expenditures, with possible indeterminacy of the high BGP. Importantly, deficit monetization is shown to reduce the parameter space producing indeterminacy.
KeywordsEndogenous growth Deficit Monetization Indeterminacy Public debt
JEL ClassificationE41 E52 E62 H62 H63
We are extremely grateful to Nicholas Yannelis (Editor) and to two anonymous referees, for extensive comments on a previous version of the paper. We benefited from many comments from C. Aubin, T. Azomahou, E. Bond, J.-B. Chatelain, J.-L. Combes, M. Copaciu, C. Cornand, F. Dufourt, C. Litan, V. Midrigan, M. Mutascu, T. Palivos, C. Pintilescu, T. Seegmuller, A. Venditti, M. Voia, P. Wang, T. Xepapadeas, and C. Yip, and especially from F. Magris and D. Onori. We thank participants to conferences GDRE (Clermont-Ferrand and Nice), GEBA (Iasi), Journées LAGV (Marseille), and to the seminar at LEO (Orléans). Usual disclaimers apply.
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