Speaker
André Silva
NOVA SBE

Presentation
Financing the Government with Taxes or Inflation

Abstract
An increase in government expenditures generates debt that in the long run has to be financed with taxes or inflation. We show that the predictions of an increase in government expenditures change when the reaction of agents toward their demand for money is taken into account. In the model, agents change their demand for money by changing the frequency of exchanges of bonds and money. In standard cash-in-advance models, this frequency is fixed, usually at aquarter. With fixed frequency, financing expenditures with taxes or inflation implies similar efects on output, hours of work, and welfare. With endogenous frequency, financing expenditures with taxes and inflation produces opposing efects. Hours of work and output increase when expenditures are financed with inflation. Although output increases, the welfare cost is 2 percentage points higher when the increase in expenditures is financed with inflation.

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ORGANIZING TEAM
This seminars series is organized by Joana Pais (ECO), Raquel M. Gaspar (FIN/MG) and Isabel Proença (QM).

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