Endogenous growth, money, taxes and foreign debt

Abstract

This paper uses a model of endogenous non-scale growth to examine the tradeoff between raising public foreign debt and sustaining growth. It is shown that a tight monetary policy accompanied by an increase in the tax rate on income from capital may be inconsistent with economic growth. In such a case, the economy could instead suffer a recession. The paper also analyzes the effects of distortionary taxes on the perfect foresight equilibrium. The model provides, for the Mexican economy, some insights into the failed trade-off between raising public foreign debt and sustaining growth in 1994, and the sharp fall in growth in 1995 when fiscal and monetary policies, obeying a program of economic adjustment, were inconsistent with a macroeconomic equilibrium with positive growth.