Taipei, Taiwan : Department of Industrial Economics, Tamkang University
We develop a two-sector endogenous growth model with productive externality and cash-in-advance (CIA) constraint on consumption purchases to assess the effects of two government fmancings (money fmancing and income-tax fmancing) on growth, inflation and welfare. We fmd that money fmancing is superior to income-tax fmancing from a growth perspective but the reverse is true from an inflation perspective. The optimal mix of both
fInancing to maximizing growth rate consists only of money fmancing and not of income taxation. In addition, from a welfare perspective, both ranking and optimal mix to maximizing welfare depend on the strength of productive externality under a small enough rate of time preference. Finally, if we add investment purchases into CIA constraint, the main results are also similar.
2009 International Conference on Trade, Industrial and Regional Economics, 31p