This paper develops an original analysis of deficit monetization in a growth model with transaction costs, in which economic growth interacts with productive public expenditures. This interaction generates two positive balanced growth paths (BGP) in the long run: a high BGP and a low BGP. The transitional dynamics show that multiplicity cannot be rejected if transaction costs affect both consumption and investment expenditures, with possible indeterminacy of the high BGP. Importantly, deficit monetization is shown to reduce the parameter space producing indeterminacy.

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Keywords Deficit, Endogenous growth, Indeterminacy, Monetization, Public debt
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Journal Economic Theory
Menuet, M. (Maxime), Minea, A, & Villieu, P. (Patrick). (2017). Deficit, monetization, and economic growth: a case for multiplicity and indeterminacy. Economic Theory, 1–35. doi:10.1007/s00199-017-1040-5