||This thesis introduces money into the Barro (1990) model, and specifies that government’s infrastructure expenditure is financed by both income taxes and seigniorage revenue. Then, this thesis focuses on how the relative ratio between money financing and taxes financing will govern the balanced growth rate and the level of social welfare.|
Several main findings emerge from the analysis. First, the growth rate would attain its maximization when the income tax rate is equal to the production externality of infrastructure expenditure. Second, a rise in the proportion of money financing is beneficial to the balanced growth rate. Third, according to the calibration results, a rise in the proportion of money financing has an ambiguous effect on the level of social welfare. If the growth rate effect dominates the initial consumption effect, social welfare will rise in response; otherwise, social welfare will fall in response. As a consequence, the economy exists an optimal proportion of money financing.