Money-Financed versus Debt-Financed Fiscal Stimulus with Borrowing Constraints

Lorenza Rossi and Chiara Punzo

No 131, DEM Working Papers Series from University of Pavia, Department of Economics and Management

Abstract: We consider a NK-DSGE model with distortive taxation and heterogeneous agents, modeled using a modified version of the mechanism pro- posed by Bilbiie, Monacelli and Perotti (2012). Following Galì (2014), we study the effects of a shock to government purchases under two alternative financing regimes: (i) monetary financing; (ii) debt financing. Particularly, we focus on the redistributive effects of the two regimes and we find the following. Both regimes imply a redistributive effect from savers to borrowers, measured in terms of the ratio between the consumption of borrowers and that of savers. The redistribution is much greater in the money-financed fiscal stimulus, where the consumption ratio is more than three times higher than the implied one in the debt-financed fiscal stimulus. Borrowers are better o¤ also in terms of their relative labor supply and money demand. Finally, with respect to the representative agent model, the presence of borrowers enhances the impact of the fiscal intervention on aggregate output, when spending is debt financed. Remarkably, with respect to Galì (2014) the same regime implies a reduction of the debt burden instead of an increase.

Pages: 27 pages
Date: 2016-12
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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