Monetary financing does not produce miraculous fiscal multipliers

Christiaan van der Kwaak

No 2417, Discussion Papers from Centre for Macroeconomics (CFM)

Abstract: High levels of government debt raise the question to what extent the private sector will be willing to absorb the additional government debt that would finance future fiscal stimuli. One alternative is to money-finance such stimuli by letting the central bank buy the additional bonds and permanently retain these on its balance sheet. In this paper, I investigate the effectiveness of such money-financed fiscal stimuli when the central bank pays interest on reserves, and focus on the case where reserves and bonds are not perfect substitutes. I show for several New Keynesian models that money-financed fiscal stimuli have zero macroeconomic impact with respect to debt-financed stimuli, despite reducing funding costs for the consolidated government. Finally, I investigate the quantitative impact of money-financed fiscal stimuli for an extension where this 'irrelevance result' is broken, and find that the impact is substantially smaller than in the literature.

Keywords: Monetary Policy; Fiscal Policy; Monetary-Fiscal Interactions; Monetary financing (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 E63 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2024-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cfm:wpaper:2417

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