Working Paper: CEPR ID: DP270
Authors: Frederick van der Ploeg
Abstract: A two-country, optimizing model with capital accumulation, purchasing power parity, floating exchange rates, uncovered interest parity, perfect foresight, finite lives and population growth is developed and analyzed. For the special case of a zero birth rate, individuals are indifferent between tax-finance and bond-finance or money-finance, so that both Ricardian debt-neutrality and monetary super-neutrality prevail. The general case is analyzed by decomposing the model into global averages and differences. A tax-financed increase in monetary growth leads to an interdependent Mundell-Tobin effect in which the world real interest rate falls and capital accumulation increases. A home monetary expansion leads to an increase in home consumption, a fall in foreign consumption and an increase in home holdings of foreign assets. If the expansion occurs through open-market operations, money is super-neutral. The international spillover effects of tax-financed and bond-financed increases in government spending and of bond-financed increases in lump-sum taxation are also considered.
Keywords: interdependent economies; mundell-tobin effect; finite lives; ricardian debt equivalence; monetary neutrality
JEL Codes: 430; 441
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) | decrease in world real interest rate (E43) |
| increase in monetary growth (O42) | increase in global capital accumulation (F62) |
| home monetary expansion (E49) | increase in home consumption (D10) |
| home monetary expansion (E49) | decrease in foreign consumption (F69) |
| home monetary expansion (E49) | increase in home holdings of foreign assets (G15) |
| joint increase in monetary growth (O42) | one-for-one increase in inflation (E31) |
| joint increase in monetary growth (O42) | increase in nominal interest rates (E43) |
| joint increase in monetary growth (O42) | increase in global capital output (F62) |
| birth rate is zero (J11) | Ricardian debt neutrality prevails (H69) |