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ISEG 2S | Financing the Government with Taxes or Inflation

01 Nov das 11:30 às 11:31
Quelhas 6 | Floor 3 | Delta Room


André Silva



Financing the Government with Taxes or Inflation


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


All speakers are available to meet faculty at ISEG before the talk. Slots are limited. To book your time with the speaker, contact one of the coordination team members.


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