Government Spending, Debt Management, and Wealth and Income Inequality in a Growing Monetary Economy*

Abstract

This paper compares the impact of government investment and government consumption on macroeconomic aggregates and inequality when the government deficit is money‐financed while maintaining a fixed debt‐money ratio. Real aggregate quantities are independent of the debt‐money ratio, as is wealth inequality, but income inequality is impacted. We also investigate the impact of these two forms of government expenditure on the macroeconomic aggregates and distributions, illustrating their sharply contrasting effects on the tradeoffs they entail. While government investment is more effective in increasing the growth rate and moderating inflation, it has a more adverse effect on long‐run income inequality.