Fiscal and Monetary Policy Interactions in an Endogenous Growth Model With Financial Intermediaries

Abstract

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The Optimal Public Expenditure Financing Policy: Does the Level of Economic Development Matter?

“…In practice, the probability of relocation could depend on the state of an economy. We consider this variable to be exogenous (as in Bhattacharya et al 1997;Champ, Smith, and Williamson 1996;Espinosa-Vega andYip 1999, 2000;Schreft and Smith 1997) and view its role being simply to capture the liquidity preference shocks. The same shock can be motivated by assuming at the outset that individuals differ (ex post) in their need to hold cash (e.g., Bencivenga and Smith 1991;Diamond and Dybvig 1983).…”

“…2 2 We also assume that there is limited communication across locations, which prevents agents who are relocated from trading privately issued claims. For detailed discussion, refer to Bhattacharya et al (1997) and Espinosa‐Vega and Yip (1999). …”

Dollarization and the inflation threshold

“…Relocated agents must carry fiat currency, local or foreign, to the other island to purchase consumption. 6 This set-up follows, among others, Townsend (1987), Champ, Smith, and Williamson (1996), Schreft andSmith (1997, 1998) and Espinosa-Vega and Yip (1999), where money plays a transactions role by overcoming the friction represented by limited communication and spatial separation between islands. The relevant implication of this construction is that money can co-exist with other assets and be dominated in rate of return in equilibrium.…”

“…We employ an overlapping generations model in which spatial separation and limited communication generate a transactions role for fiat money (see Townsend 1987; Champ, Smith, and Williamson 1996; Schreft and Smith 1997, 1998; and Espinosa‐Vega and Yip 1999). We assume the presence of two currencies: a domestic, possibly high‐inflation currency with a negative net real rate of return, and a foreign currency, referred to as dollar, that yields a zero net rate of return.…”

Inflation and Economic Growth in China: An Empirical Analysis

“…However, some economists assert that, under assumptions such as cash-in-advance constraints and deposit reserve regulations, inflation is detrimental to capital accumulation and steady-state output (Stockman, 1981;Cooley and Hansen, 1989;Jones and Manuelli, 1995). Taking this into account, some researches believe that a nonlinear inflation-growth nexus might exist (Espinosa-Vega and Yip, 1999;Hung, 2001). The debate inspires us to examine the nonlinear effects of inflation on growth.…”