The welfare effects of government's preferences over spending and its financing

Alper, C. Emre and Ardic, Oya Pinar and Mumcu, Ayşe and Saglam, Ismail (2006): The welfare effects of government's preferences over spending and its financing.

Abstract

In this paper we examine the welfare effects of government's preferences over consumption and investment spending under different methods of financing in a two-period OLG model. The government has a utility function defined over the decomposition of her spending over two periods and raises funds by issuing bonds and by printing money. She allocates her funds into consumption expenditure that benefits the current population and investment expenditure which benefits the future population. The model is calibrated using data on the U.S. economy for the period 1981-2004. The findings reveal that the government's choice of financing as well as composition of spending into consumption-investment have differing impacts on the welfare of the young and old generations.

• Item Type: MPRA Paper
• Institution: Bogazici University
• Language: English
• Keywords: Seigniorage; Bond financing; Composition of government spending; Overlapping generations
• Subjects: O - Economic Development, Innovation, Technological Change, and Growth > O4 - Economic Growth and Aggregate Productivity > O42 - Monetary Growth Models; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E62 - Fiscal Policy