The Effects of a Money-Financed Fiscal Stimulus Under Fiscal Stress

Hao Jin () and Junfeng Wang ()
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Hao Jin: Beihang University

CAEPR Working Papers from Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington

Abstract: This paper studies the local determinacy requirements and effects of a money-financed fiscal stimulus under fiscal stress in a canonical New Keynesian model. We consider three alternative monetary policies and find that:(1) The money-financed policy adopted in Gal? (2020) to keep real debt level unchanged (zero-debt-increase policy, or ZDI) leads to an unsustainable debt path, while introducing a debt growth target restores stability. (2) A debt-targeting money growth rule (DT) generates smaller instantaneous multipliers and larger cumulative multipliers with respect to ZDI. (3) A mixed-targeting money growth rule (MT) that takes both debt and inflation into consideration exaggerates the trade-off between short-run and long-run multipliers. In addition, we show that relative to seiniorage, inflation and changes in the discount factor play more important roles in financing fiscal stimulus. The results above hold with alternative degree of price stickiness, velocity of money and steady state debt level. Moreover, the effectiveness of a money-financed fiscal stimulus increases when the government issues real instead of nominal debt.

Keywords: Fiscal Stimulus; Fiscal Stress; Seigniorage; Government Debt (search for similar items in EconPapers)
Pages: 67 pages
Date: 2023-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:inu:caeprp:2023006

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