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

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. JEL Classification: O40; O31; J31; E52; E41; E62