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Money-Financed Fiscal Stimulus: The Effects of Implementation Lag

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  • Takayuki Tsuruga
  • Shota Wake

Abstract

Previous studies argue that, based on the New Keynesian framework, a fiscal stimulus financed by money creation has a strong positive effect on output under a reasonable degree of nominal price rigidities. This paper investigates the effects of implementation lag in the money-financed fiscal stimulus on output. We show that if a money-financed government purchase has a time lag between the decision and the implementation: (1) it may cause a recession rather than a boom when the economy is in normal times; (2) it may deepen a recession when the economy is caught in a liquidity trap; (3) the longer is the implementation lag, the deeper is the recession; and (4) the depth of the recession depends on the interest semi-elasticity of money demand. Our results imply that to strengthen the efficacy of the money-financed fiscal stimulus, policymakers should shorten the implementation lag based on detailed knowledge of the money demand function.

Suggested Citation

  • Takayuki Tsuruga & Shota Wake, 2018. "Money-Financed Fiscal Stimulus: The Effects of Implementation Lag," ISER Discussion Paper 1038, Institute of Social and Economic Research, Osaka University.
    • Handle: RePEc:dpr:wpaper:1038
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    3. Mosley, Max, 2021. "The importance of being earners: Modelling the implications of changes to welfare contributions on macroeconomic recovery," MPRA Paper 108620, University Library of Munich, Germany.
    4. Okano, Eiji & Eguchi, Masataka, 2021. "The Effects of Money-financed Fiscal Stimulus in a Small Open Economy," Dynare Working Papers 70, CEPREMAP.
    5. Thomas J. Carter & Rhys R. Mendes, 2020. "The Power of Helicopter Money Revisited: A New Keynesian Perspective," Discussion Papers 2020-1, Bank of Canada.
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    8. Leon A. Petrosyan & David W.K. Yeung, 2020. "Cooperative Dynamic Games with Durable Controls: Theory and Application," Dynamic Games and Applications, Springer, vol. 10(4), pages 872-896, December.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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