Seminar in Macroeconomics - André Castro Silva (Nova School of Business and Economics)
Government Financing, Inflation, and the Financial Sector
Tuesday 19 March 2019 (12h15 - 13h30) - Extranef - 109
We calculate the effects of an increase in government spending financed with labor income taxes or inflation. Government spending takes the form of government consumption or transfers. In the model, agents increase the use of financial services to avoid losses from inflation, as empirically the financial sector increases with inflation. In standard cash-in-advance models, the financial sector size is constant, which implies that it is optimal to finance the government with inflation. In our framework, it is optimal to use taxes rather than inflation. This result is robust to alternative specifications and definitions of seigniorage and government spending.
Luis Santos Pinto