Money-Financed Fiscal Programs: A Cautionary Tale

48 Pages Posted: 5 Jun 2017

See all articles by William B. English

William B. English

Board of Governors of the Federal Reserve System

Christopher J. Erceg

Board of Governors of the Federal Reserve System

David Lopez-Salido

Board of Governors of the Federal Reserve System

Date Written: June, 2017

Abstract

A number of prominent economists and policymakers have argued that money-?nanced ?scal programs (helicopter drops) could be e?cacious in boosting output and in?ation in economies facing persistent economic weakness, very low in?ation, and signi?cant ?scal strains. We employ a fairly conventional macroeconomic model to explore the possible e?ects of such policies. While we do ?nd that money-?nanced ?scal programs, if communicated successfully and seen as credible by the public, could provide signi?cant stimulus, we underscore the risks that would be associated with such a program. These risks include persistently high in?ation if the central bank fully adhered to the program; or alternatively, that such a program would be ine?ective in providing stimulus if the public doubted the central bank?s commitment to such an extreme strategy. We also highlight how more limited forms of monetary and ?scal cooperation ? such as a promise by the central bank to be more accommodative than usual in response to ?scal stimulus ? may be more credible and easier to communicate, and ultimately more e?ective in providing economic stimulus.

Keywords: DSGE Model, Fiscal policy, Liquidity Trap, Monetary policy, currency unions

JEL Classification: E52, E58

Suggested Citation

English, William B. and Erceg, Christopher J. and Lopez-Salido, David, Money-Financed Fiscal Programs: A Cautionary Tale (June, 2017). FEDS Working Paper No. 2017-60, Available at SSRN: https://ssrn.com/abstract=2979976 or http://dx.doi.org/10.17016/FEDS.2017.060

William B. English (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-736-5645 (Phone)
202-452-3819 (Fax)

Christopher J. Erceg

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-452-2575 (Phone)
202-736-5638 (Fax)

David Lopez-Salido

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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