DP270 Monetary and Fiscal Policy in Interdependent Economies with Capital Accumulation, Death and Population Growth

Author(s): Frederick van der Ploeg
Publication Date: September 1988
Keyword(s): Bonds, Monetary Growth, Monetary Neutrality, Open Economy Model, Taxation
JEL(s): 023, 111, 311, 321, 441
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=270

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.