Money-Financed Fiscal Stimulus: The Effects of Implementation Lag

Takayuki Tsuruga and Shota Wake

ISER Discussion Paper from Institute of Social and Economic Research, Osaka University

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.

Date: 2018-08
New Economics Papers: this item is included in nep-mac and nep-mon
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Journal Article: Money-financed fiscal stimulus: The effects of implementation lag (2019)
Working Paper: Money-financed fiscal stimulus: The effects of implementation lag (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:dpr:wpaper:1038

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