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The effects of a money-financed fiscal stimulus

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  • Galí, Jordi

Abstract

I analyze the effects of a money-financed fiscal stimulus and compare them with those resulting from a conventional debt-financed stimulus. I study the effects of both a tax cut and an increase in government purchases, with and without a binding zero lower bound (ZLB) on the nominal interest rate. When the ZLB is not binding, a money-financed fiscal stimulus is shown to have much larger multipliers than a debt-financed fiscal stimulus. That difference in effectiveness persists, but is much smaller, under a binding ZLB. Nominal rigidities are shown to play a major role in shaping those effects.

Suggested Citation

  • Galí, Jordi, 2020. "The effects of a money-financed fiscal stimulus," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 1-19.
  • Handle: RePEc:eee:moneco:v:115:y:2020:i:c:p:1-19
    DOI: 10.1016/j.jmoneco.2019.08.002
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Six methods of unconventional monetary policy
      by Giulia Bellocchio in TVHE on 2019-09-25 20:00:13
    2. The effects of a money-financed fiscal stimulus
      by Christian Zimmermann in NEP-DGE blog on 2014-10-23 18:22:26

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    4. Auerbach, Alan J. & Gorodnichenko, Yuriy & Murphy, Daniel, 2021. "Inequality, fiscal policy and COVID19 restrictions in a demand-determined economy," European Economic Review, Elsevier, vol. 137(C).
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    15. Andreas Tischbirek, 2016. "Unconventional Monetary Policy in a Currency Union with Segmentation in the Market for Government Debt," Cahiers de Recherches Economiques du Département d'économie 16.16, Université de Lausanne, Faculté des HEC, Département d’économie.
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    More about this item

    Keywords

    Seignorage; Government spending; Fiscal multipliers; Helicopter drop;
    All these keywords.

    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

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