Open Access Journal Article

The budget deficit in an endogenous growth model with bequest and money holdings

by Yasuhito Tanaka a,* orcid
a
Faculty of Economics, Doshisha University, Kyoto, Japan
*
Author to whom correspondence should be addressed.
EAL  2023, 15; 2(1), 15; https://doi.org/10.58567/eal02010005
Received: 28 February 2023 / Accepted: 22 March 2023 / Published Online: 23 March 2023
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Abstract

By an endogenous growth model with a two-period overlapping generations structure, I examine the existence of a budget deficit in an economy that endogenously grows by investments of firms. The consumers leave bequests to their descendants and hold money as a part of their savings. I use a Barro-type utility function, where people include the utility of their children in their own utility. The main results are as follows. 1) A budget deficit is necessary for full employment under constant prices. 2) Inflation is induced if the actual budget deficit is greater than the value at which full employment is achieved under constant prices. 3) If the actual budget deficit is smaller than the value which is necessary and sufficient for full employment under constant prices, a recession occurs. Therefore, a balanced budget cannot achieve full employment under constant prices. I do not assume that the budget deficit must later be made up by a budget surplus. I use a Barro-type utility function to prove the necessity (or inevitability) of a budget deficit instead of the neutrality of government debt. In the appendix of this paper, I show that if money, as well as goods, are produced by capital and labor, a budget deficit is not necessary for full employment under constant prices.

Keywords: Budget deficit; Growing economy; Endogenous growth model;
Copyright: © 2023 by Tanaka. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

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ACS Style
Tanaka, Y. The budget deficit in an endogenous growth model with bequest and money holdings. Economic Analysis Letters, 2023, 2, 15. https://doi.org/10.58567/eal02010005
AMA Style
Tanaka Y. The budget deficit in an endogenous growth model with bequest and money holdings. Economic Analysis Letters; 2023, 2(1):15. https://doi.org/10.58567/eal02010005
Chicago/Turabian Style
Tanaka, Yasuhito 2023. "The budget deficit in an endogenous growth model with bequest and money holdings" Economic Analysis Letters 2, no.1:15. https://doi.org/10.58567/eal02010005
APA style
Tanaka, Y. (2023). The budget deficit in an endogenous growth model with bequest and money holdings. Economic Analysis Letters, 2(1), 15. https://doi.org/10.58567/eal02010005

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References

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