Analysis of monetary policies in relation to endogenous models
When one analyzes the monetary policies in relation to the endogenous models, the theoretical consequences on such models reveal that they are harmful or at best neutral when it comes to the business cycles of economies such as in the exogenous models. Some scholars suggest that the inflation rates that are associated with this model, which is used as a proxy of the expansionist monetary policies, are detrimental to long-run performances in the economy. Works associated with this model and policy seems to suggest that there is a negative correlation that exists between the inflation levels and the economic growth of a nation. However, these studies are linked to countries that suffer high inflation rates such as developing countries showing that the relationship that exists between the inflation rates and the economic growth in these countries is non-linear. This is enhanced by the econometric results that exhibit threshold effects in these inflation levels and economic growth.
There are some studies that illustrate the merit of unifying the analysis of both fiscal and monetary policies. Some scholars reviewed this case and came up with strong empirical evidence suggested that the existence of non-linearities in the effects of fiscal deficits and seigniorage ax rates on the economy of a nation. In an endogenous growth economic model with transaction costs, public finance expenditures are deciphered from the maximum growth level in which the government has to choose high seigniorage if the tax evasion and financial repression aspects are high and vice versa. This model is a unique facet in elaborating the different ways in which governments maximum-growth strategies related to the economy, such as seigniorage and inflationary finance, as well as high-tax rates.
It is vital to note that these maximum-growth strategies are related to the different structures of the varied governments in question which have different and similar monetary and fiscal policies such as those on taxes. Those governments that have inefficient tax systems such as high levels of tax evasion or low levels of financial development may opt to select seigniorage as a strategy to grow the economy and government finance which is associated with high rates of inflation. Just like some scholars, including Sala-i-Martin, this analysis is in line with their analysis with the difference in the framework in which they examine the threshold effects of both monetary and fiscal policies. One analysis that is equated to the inflationary policies contrary to other scholars is that these policies do not have to conduct poor growth performances in the economy substantially. They may result in a maximum growth level of the economy for governments since the seigniorage allows them to make productive public expenditures that enhance this growth.
The endogenous growth model is consistent with the evidence provided by other scholars on the role of financial repression or development in the growth of a nation’s economy. Some of these scholars include Giovanni and De Melo, who provided empirical evidence arguing a high positive correlation existing between seigniorage and financial repression which complement each other. Other scholars found empirical evidence that inflation is negatively correlated with indicators of financial development and that this relationship is subject to substantial non-linearities. The strong non-linear relation between monetary and fiscal policies and the economic growth of the endogenous economic growth model requires empirical work in terms of the income tax and the seigniorage, which are functions of the public debt. This puts this model in the case for empirical strategy implementation that eradicates the regression of policy or structural indicators.