Department of Economics and Business - Universitat Pompeu Fabra

Title:: The effects of a money-financed fiscal stimulus
Author:: Jordi Galí
Date:: September 2014 (Revised: July 2019)
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.
Keywords:: seignorage, government spending, fiscal multiplier, helicopter drop.
JEL codes:: E32, E52, E62
Area of Research:: Macroeconomics and International Economics

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