The Influence of Monetary and Fiscal Policies on Social Welfare
18 Pages Posted: 11 Mar 2008
Date Written: 2006
The paper analyses the way in which monetary and fiscal policy influences the performances of economic growth and social welfare. The analysis is made on the basis of a dynamic model with discrete variables. The model is with a representative private agent and a government sector consisting of a consolidated fiscal authority and central bank. Households, in each period, decide about consumption, investment in physical capital, and financial investment in government bonds. The model is built in such a way that satisfaction of the budget constraint of the representative household implies satisfaction of the budget constraint of the government.
The model has two state variables: the first is private wealth (consisting of money, bonds and physical capital), and the second is physical capital. The decision variables are: private nominal consumption, social nominal consumption and the amount of bonds bought by the private agent. The optimality conditions are obtained by using the Maximum Principle for discrete dynamic systems. A qualitative analysis of the optimal trajectories is performed, on the basis of the information provided by the Maximum Principle, concerning the dynamics of the dual variables. Finally, we analyze the influence of several monetary and fiscal decisions on the optimal trajectories of the model.
Keywords: Economic Growth, Monetary Policy, Fiscal Policy, Fiscal Solvency, Maximum Principle
JEL Classification: C61, D99, E31, E41, E62, E63, H62, H63, O41
Suggested Citation: Suggested Citation