A general equilibrium model of public goods and macroeconomic policy

In the thesis I examine a finite horizon, monetary equilibrium model, with a government that is engaged in the production of public goods. The model provides a framework in which the classic issues of macroeconomic policy, and public finance can be analysed using the general equilibrium methodology.; The government produces public goods, and finances their production by borrowing from a bank, and printing money. The money it owes is repaid by levying sales taxes. Taxes are levied in accordance with the tax policy of the government, and expenditures on inputs must conform to its expenditure policy. The choice of tax policy, expenditure policy, and money printed is collectively known as the policy of the government. In equilibrium the government's actions must conform to its policy, and balance its budget. It is shown that for any policy of the government a monetary equilibrium exists, provided the 'Gains to Trade Hypothesis' is satisfied. We consider a variation of the model in which interest rates on the loan markets are exogenously fixed, and the quantity of money supplied on each loan market is determined endogenously. In this model for any policy of the government, an equilibrium is shown to exist.; For any choice of government policy, equilibria are generically finite (by a standard argument). This enables us to carry out comparative static analysis as government policy is varied. Some qualitative phenomena highlighted via propositions and robust examples are the following: (1) The objectives of growth and equity may be contradictory. In particular, I identify conditions under which at least one of the suppliers of inputs must be worse off following an increase in the output of the economy. (2) The indirect demand stimulating impact of government spending can be quite significant. Indeed, situations can arise when the government can bring about an increase in the total output merely by employing workers to 'dig holes and fill them up'.; I also pinpoint conditions under which as the amount of money printed by the government rises to a finite 'hyperinflation' will occur, i.e., prices shoot off to infinity choking trade.