Monetary and Fiscal Policy in an Optimising Model with Capital Accumulation and Finite Lives.

This paper considers the effects of monetary and fiscal policies in an optimizing model with capital accumulation and a pos itive birth rate. An increase in monetary growth leads to a reduction in the real interest rate and a boost of capital and total consumpti on. However, the superneutrality result still prevails when open-mark et operations are used to increase monetary growth and preferences ar e separable. A tax-financed fiscal expansion reduces capital and crow ds out consumption by more than 100 percent. A bond-financed fiscal e xpansion increases capital by less and crowds out consumption by more than a money-financed fiscal expansion. Copyright 1988 by Royal Economic Society.