TITLE:
Government Expenditure Financing in the Money-in-the-Production-Function Model
AUTHORS:
Akihiko Kaneko, Daisuke Matsuzaki
KEYWORDS:
Money-in-Production Function, Financing Methods, Endogenous Growth Model
JOURNAL NAME:
Theoretical Economics Letters,
Vol.8 No.2,
February
6,
2018
ABSTRACT: In this study, we consider a scenario in which the
government resorts to an income and inflation tax to finance its expenditures
in the money-in-the-production-function model. We show that a financing shift
from the inflation tax to the income tax increases the real money holdings-to-capital
ratio because the accumulation of capital is less favorable than holding money.
We also find that a country’s economic growth rate is maximized if all
government expenditures are financed through an income tax. For welfare
maximization, the government should set the income tax rate higher than the
growth maximizing tax rate and reimburse the excess revenue using money
contraction.