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

Author

Listed:
  • Hao Jin

    (Beihang University)

  • Junfeng Wang

    (Xiamen University)

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.

Suggested Citation

  • Hao Jin & Junfeng Wang, 2023. "The Effects of a Money-Financed Fiscal Stimulus Under Fiscal Stress," CAEPR Working Papers 2023-006 Classification-E, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    • Handle: RePEc:inu:caeprp:2023006
    as

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    File URL: https://caepr.indiana.edu/RePEc/inu/caeprp/caepr2023-006.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Fiscal Stimulus; Fiscal Stress; Seigniorage; Government Debt;
    All these keywords.

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