Financing Government Expenditures in an Open Economy

Jill A. Holman

University of Wisconsin--Milwaukee

Kyriakos C. Neanidis

University of Wisconsin--Milwaukee

April 2003

Preliminary draft. Please do not cite.

Abstract

We develop an endogenous growth model to compare the growth effects of fiscal and monetary methods to finance a productive government input in a small open economy. Allowing for income-tax evasion and currency substitution an inefficiency arises with each form of public finance. We numerically calibrate the model to several developing economies to assess quantitatively which government policy retards growth less. The analysis suggests that the government's choice of financing is important even when its inputs are productive.

Currency substitution; Endogenous growth; Income-tax evasion;

E63; F43