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Money-Financed Fiscal Programs : A Cautionary Tale

Author

Listed:
  • William B. English
  • Christopher J. Erceg
  • J. David Lopez-Salido

Abstract

A number of prominent economists and policymakers have argued that money-financed fiscal programs (helicopter drops) could be efficacious in boosting output and inflation in economies facing persistent economic weakness, very low inflation, and significant fiscal strains. We employ a fairly conventional macroeconomic model to explore the possible effects of such policies. While we do find that money-financed fiscal programs, if communicated successfully and seen as credible by the public, could provide significant stimulus, we underscore the risks that would be associated with such a program. These risks include persistently high inflation if the central bank fully adhered to the program; or alternatively, that such a program would be ineffective in providing stimulus if the public doubted the central bank’s commitment to such an extreme strategy. We also highlight how more limited forms of monetary and fiscal cooperation – such as a promise by the central bank to be more accommodative than usual in response to fiscal stimulus – may be more credible and easier to communicate, and ultimately more effective in providing economic stimulus.

Suggested Citation

  • William B. English & Christopher J. Erceg & J. David Lopez-Salido, 2017. "Money-Financed Fiscal Programs : A Cautionary Tale," Finance and Economics Discussion Series 2017-060, Board of Governors of the Federal Reserve System (US).
  • Handle: RePEc:fip:fedgfe:2017-60
    DOI: 10.17016/FEDS.2017.060
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    File URL: https://www.federalreserve.gov/econres/feds/files/2017060pap.pdf
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    References listed on IDEAS

    as
    1. Nelson, Edward & Nikolov, Kalin, 2003. "UK inflation in the 1970s and 1980s: the role of output gap mismeasurement," Journal of Economics and Business, Elsevier, vol. 55(4), pages 353-370.
    2. Gauti B. Eggertsson & Neil R. Mehrotra & Sanjay R. Singh & Lawrence H. Summers, 2016. "A Contagious Malady? Open Economy Dimensions of Secular Stagnation," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 581-634, November.
    3. Masato Shizume, 2009. "The Japanese Economy during the Interwar Period: Instability in the Financial System and the Impact of the World Depression," Bank of Japan Review Series 09-E-2, Bank of Japan.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Government and central bank coordination in a low inflation world
      by Giulia Bellocchio in TVHE on 2019-08-23 20:17:54

    Citations

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    Cited by:

    1. Chiara Punzo & Lorenza Rossi, 2019. "The Redistributive Effects of a Money-Financed Fiscal Stimulus," DEM Working Papers Series 168, University of Pavia, Department of Economics and Management.
    2. repec:eee:dyncon:v:104:y:2019:i:c:p:132-151 is not listed on IDEAS
    3. Tsuruga, Takayuki & Wake, Shota, 2019. "Money-financed fiscal stimulus: The effects of implementation lag," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 132-151.

    More about this item

    Keywords

    DSGE Model ; Fiscal policy ; Liquidity Trap ; Monetary policy ; Currency union;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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