The effects of a money-financed fiscal stimulus

Galí, Jordi, 1961-

doi:http://dx.doi.org/10.1016/j.jmoneco.2019.08.002

The effects of a money-financed fiscal stimulus

Citation

Galí J. The effects of a money-financed fiscal stimulus. Journal of Monetary Economics. 2020 Nov;115:1-19. DOI: 10.1016/j.jmoneco.2019.08.002

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.