Working Paper: CEPR ID: DP167
Authors: Giancarlo Marini; Frederick van der Ploeg
Abstract: This paper considers the effects of monetary and fiscal policies in an optimizing model with capital accumulation and finite lives. An increase in monetary growth is no longer superneutral in a money-capital economy, but leads to a reduction in the real interest rate and increases in the capital stock, seignorage revenues, human wealth and total consumption. The effect on real money balances and social welfare is ambiguous. When open-market operations are used to increase monetary growth, there are no real effects unless preferences are non-separable in consumption of goods and real money balances. A tax-financed fiscal expansion increases the rate of interest, reduces the capital stock, real money balances and human and non-human wealth, and therefore crowds out consumption by more than 100 per cent. A bond-financed fiscal expansion increases capital by less and crowds out consumption by more than a money-financed fiscal expansion. None of the above policies affect the real interest rate, capital, total wealth and consumption when households are immortal.
Keywords: monetary policy; fiscal policy; capital accumulation; finite lives; real interest rate
JEL Codes: 311
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increase in monetary growth (O42) | reduction in real interest rate (E43) |
| increase in monetary growth (O42) | increase in capital stock (E22) |
| increase in monetary growth (O42) | increase in seignorage revenues (H69) |
| increase in monetary growth (O42) | increase in human wealth (O49) |
| increase in monetary growth (O42) | increase in total consumption (E20) |
| tax-financed fiscal expansion (E62) | increase in rate of interest (E43) |
| tax-financed fiscal expansion (E62) | reduction in capital stock (E22) |
| tax-financed fiscal expansion (E62) | reduction in real money balances (E41) |
| tax-financed fiscal expansion (E62) | reduction in human wealth (E21) |
| tax-financed fiscal expansion (E62) | reduction in nonhuman wealth (Q30) |
| tax-financed fiscal expansion (E62) | crowding out of consumption (E21) |
| bond-financed fiscal expansion (E62) | increase in capital (E22) |
| bond-financed fiscal expansion (E62) | crowding out of consumption (E21) |
| immortal households (D15) | no effect on real interest rate (E43) |
| immortal households (D15) | no effect on capital (G31) |
| immortal households (D15) | no effect on total wealth (F69) |
| immortal households (D15) | no effect on consumption (D19) |
| mortality (I12) | less patient private agents (I11) |
| less patient private agents (I11) | less capital accumulation (E22) |
| less patient private agents (I11) | higher real interest rate (E43) |