COORDINATING MACROECONOMIC POLICY IN A SIMPLE AK GROWTH MODEL

Modern theories of government finance stress the importance of an economy’s fiscal deficits in determining the course of monetary policy. Modern growth theory stresses the role of monetary factors in economic growth. This paper explores how these two are interrelated, using a simple AK growth model, one with money, reserve requirements, and government debt. We provide a comprehensive look at the coordination of macroeconomic policy and its effects on long-run growth under three alternative coordinating arrangements. We uncover some unconventional results regarding the relationship between growth and a number of policy variables; these rest squarely on the constraint of the coordination process