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The Cantillon Effect of Money Injection through Deficit Spending

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  • Wenli Cheng
  • Simon D. Angus

Abstract

This paper develops a simple dynamic model to study some of the implications of Cantillon’s insight that new money enters an economy at a specific point and that it takes time for the new money to permeate the economy. It applies a process analysis and uses numerical simulations to map out how the economy changes from one period to the next following a money injection. It finds that, within the region of stability, a money injection can generate oscillating changes in real variables for a considerably long period of time before converging back to the initial steady state. It also finds that a money injection benefits first recipients of the new money, but hurts later recipients and savers. Our simulation suggests that in our model savers can lose from a money injection even if they are first recipients of the new money.

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Bibliographic Info

Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 12-12.

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Length: 43 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:mos:moswps:2012-12

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  1. Dellas, Harris, 2006. "Monetary Shocks and Inflation Dynamics in the New Keynesian Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(2), pages 543-551, March.
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  12. Huw Dixon & Engin Kara, 2010. "Can We Explain Inflation Persistence in a Way that Is Consistent with the Microevidence on Nominal Rigidity?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 151-170, 02.
  13. Sargent, Thomas J., 1999. "A primer on monetary and fiscal policy," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1463-1482, October.
  14. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  15. Alan S. Blinder, 1991. "Why are Prices Sticky? Preliminary Results from an Interview Study," NBER Working Papers 3646, National Bureau of Economic Research, Inc.
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