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A simple model of the simultaneous determination and interaction of inflation and economic growth is constructed by incorporating money into an optimal growth framework with constant returns to capital. Various channels through which increased inflation tends to reduce growth and declining growth tends to amplify inflation are discussed. Special attention is paid to the potential effects of inflation (a) on saving through real interest rates (or uncertainty), (b) on the income velocity of money, and (c) on the government budget deficit through the inflation tax and tax erosion. Numerical analysis of the model indicates that, although a wide variety of outcomes is possible, inflation and growth tend to be negatively correlated for reasonable values and constellations of the structural parameters of the model, and to vary inversely with one another in response to changes in individual parameters. In particular, budget deficits financed by monetary expansion tend to reduce growth in the long run through their interplay with inflation, saving behavior, portfolio choice, and taxes.

This book considers public debt dynamics in various endogenous growth models, namely the AK model and explicit models of innovation and human capital accumulation. Furthermore, the closed economy, the small open economy and a two-country world are analysed. In the closed economy model, the focus is on budget deficit and public debt dynamics and their influence on capital growth and output growth. Then, in the open economy model, the effects on foreign debt growth are considered. In a two-country setting, public debt growth in one country affects growth in the other country. In each scenario the government either fixes the deficit ratio or the tax rate. For both strategies the steady state is derived and stability is analysed. Then, dynamics induced by various shocks and policy measures are explored. Many diagrams illustrate the dynamics

This paper illustrates two reasonable political decision mechanisms by which fiscal policy generates endogenous growth under a constant returns to scale production technology, absent externalities. Based on the dynamics induced by various policy choices, we demonstrate that policies that maximize capital deepening generate balanced growth and are Pareto optimal. In contrast, policies chosen by the median voter produce balanced growth, but are suboptimal.