The Effects of a Money-Financed Fiscal Stimulus

33 Pages Posted: 9 Sep 2019

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 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

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Suggested Citation

Gali, Jordi, The Effects of a Money-Financed Fiscal Stimulus (September 2019). NBER Working Paper No. w26249, Available at SSRN: https://ssrn.com/abstract=3450275

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