Money-Financed Fiscal Stimulus: The Effects of Implementation Lag
ISER DP No. 1038
35 Pages Posted: 28 Aug 2018
Date Written: August 6, 2018
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: Suggested Citation