Public Investment Financed by Seigniorage and Money Supply Control

Abstract

This study examines the conditions necessary for the effective functioning of infrastructure management and monetary control policies in a seigniorage dependent economy based on an overlapping generations model. Moreover, we analyze the relationship between the ratio of private capital to public capital and changes in the general price level. The results show that when the monetary growth rate that maximizes the gross domestic product (GDP) growth rate is selected, the elasticity of the ratio of private capital to public capital with respect to monetary growth depends on the private capital elasticity of GDP. If maximizing social welfare is equivalent to maximizing economic growth, the elasticity of the ratio of private capital to public capital with respect to the share of expenditure on infrastructure investment is zero. When the initial value of the ratio of private capital to public capital is at a sufficiently low (high) level, inflation (deflation) occurs during the transition path. JEL classification: E52; H54; O40