Fiscal and monetary policy interactions in an endogenous growth model withfinancial intermediaries

This paper presents a framework that can help reconcile conflicting finding s in the growth-inflation literature. Here, the behavior of financial inter mediaries plays a crucial role in the determination of the economy's inflat ion and real growth rates. Absent any restrictions on financial intermediat ion, there will be a unique equilibrium when agents are fairly risk averse. In this case, an increase in seigniorage-financed government spending will always be inflationary and detrimental to growth. When agents exhibit a lo w degree of risk aversion, multiple equilibria emerge and a positive relati on between inflation and growth a la Tobin can be observed.