The Effects of a Money-Financed Fiscal Stimulus

50 Pages Posted: 30 Sep 2014

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: September 2014

Abstract

I analyze the effects of an increase in government purchases financed entirely through seignorage, in both a classical and a New Keynesian framework, and compare them with those resulting from a more conventional debt-financed stimulus. My findings point to the importance of nominal rigidities in shaping those effects. Under a realistic calibration of such rigidities, a money-financed fiscal stimulus is shown to have very strong effects on economic activity, with relatively mild inflationary consequences. If the steady state is sufficiently inefficient, an increase in government purchases may increase welfare even if such spending is wasteful.

Keywords: fiscal multiplier, government spending, seignorage

JEL Classification: E32, E52, E62

Suggested Citation

Gali, Jordi, The Effects of a Money-Financed Fiscal Stimulus (September 2014). CEPR Discussion Paper No. DP10165, Available at SSRN: https://ssrn.com/abstract=2503395

Jordi Gali (Contact Author)

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