Budget deficit and money holding when consumers live forever in an endogenous growth model

Abstract

<p class="MsoNormal" style="margin-top: 12pt; text-align: justify;"><span lang="EN-US" style="font-family: arial, helvetica, sans-serif;">In this paper I will show that budget deficit (or fiscal deficit) is necessary to achieve full employment under constant prices or inflation, using a model of endogenous growth in which consumers hold money for the reason of liquidity and live forever. Budget deficit need not be offset by future budget surpluses. I consider the continuous time case by taking the limit of the discrete time case when the time interval approaches zero. A continuous time dynamic model seems to be more general than a discrete time model. When the actual budget deficit is greater (smaller) than the value which is necessary and sufficient for full employment under constant prices, an inflation (a recession) occurs. The main argument of this paper is that a growing economy requires the continuation of budget deficit, and that we should not think of paying off the resulting government debt with taxes.</span></p>