Money-Financed Fiscal Stimulus: The Effects of Implementation Lag

ISER DP No. 1038

35 Pages Posted: 28 Aug 2018

See all articles by Takayuki Tsuruga

Takayuki Tsuruga

Osaka University, Institute of Social and Economic Research

Shota Wake

Cabinet Secretariate

Multiple version iconThere are 2 versions of this paper

Date Written: August 6, 2018

Abstract

Previous studies argue that, based on the New Keynesian framework, a fiscal stimulus financed by money creation has a strong positive effect on output under a reasonable degree of nominal price rigidities. This paper investigates the effects of implementation lag in the money-financed fiscal stimulus on output. We show that if a money-financed government purchase has a time lag between the decision and the implementation: (1) it may cause a recession rather than a boom when the economy is in normal times; (2) it may deepen a recession when the economy is caught in a liquidity trap; (3) the longer is the implementation lag, the deeper is the recession; and (4) the depth of the recession depends on the interest semi-elasticity of money demand. Our results imply that to strengthen the efficacy of the money-financed fiscal stimulus, policymakers should shorten the implementation lag based on detailed knowledge of the money demand function.

Keywords: Anticipation Effect, Fiscal Multiplier, Government Spending, Seigniorage

JEL Classification: E32, E52, E62

Suggested Citation

Tsuruga, Takayuki and Wake, Shota, Money-Financed Fiscal Stimulus: The Effects of Implementation Lag (August 6, 2018). ISER DP No. 1038. Available at SSRN: https://ssrn.com/abstract=3226797 or http://dx.doi.org/10.2139/ssrn.3226797

Takayuki Tsuruga (Contact Author)

Osaka University, Institute of Social and Economic Research ( email )

6-1 Mihogaoka
Ibaraki, 567-0047
Japan

HOME PAGE: http://www.iser.osaka-u.ac.jp/~tsuruga/

Shota Wake

Cabinet Secretariate ( email )

1-6-1 Nagatacho Chiyoda Ward
Tokyo, 100-8968
Japan

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