Growth, wage inequality and welfare: complementarity between fiscaland monetary policies

Abstract This theoretical paper presents a comprehensive analysis of the effects of monetary and fiscalpolicy on economic growth in the short, medium, and long term within the context of a knowledgebasedhorizontal R&D growth model. The model incorporates both skilled and unskilled labor. Thepropagation of policy effects into the model is facilitated by cash-in-advance constraints and R&Dsubsidies. Under certain conditions, both policies exert effects in the same direction on a range ofsignificant real macroeconomic variables in the long run. There is a notable complementarity inthe long-run effects on R&D intensity, skill premium, and the velocity of money. Complementarityon long-run welfare is possible if the policy effects on output dominate the effects on intermediategoods production costs and consumption. Economic conditions that favor such a complementarityinclude the labor market conditions of high Frisch elasticity of labor supply in conjunction with lowunemployment rates, a high rate of R&D discoveries, and an accelerated growth rate. Consideringthe transition dynamics when accounting for welfare tends to make policies more complementary,and such an effect is more pronounced at the beginning of the transition.