Fiscal stimuli: Monetary versus Fiscal Financing

Marco Lorusso, Francesco Ravazzolo () and Claudia Udroiu ()
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Francesco Ravazzolo: BI Norwegian Business School, Free University of Bozen-Bolzano, Italy
Claudia Udroiu: Free University of Bozen-Bolzano, Italy

No BEMPS105, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: In this paper, we investigate the use of money supply issued by the central bank to support expansionary fiscal interventions. We develop and estimate a New Keynesian model using US data for the sample 1960Q1 - 2019Q4. We conduct a quantitative counterfactual analysis to assess the effects of a fiscal stimulus that does not result in an increase in public debt, as it is financed by money supply. Our impulse response analysis indicates that both increases in government spending and transfers that are monetary financed have positive effects on private consumption, investment and output. However, the expansionary impact of monetary-financed fiscal shocks comes at a cost: an increase in inflation. Our sub-sample analysis indicates that monetary-financed fiscal stimuli would have had a greater positive impact on the economy during the Great Moderation. Lastly, we find that as the debt burden increases, the positive effects of a monetary-financed fiscal stimulus diminish

Keywords: Fiscal Policy; Monetary Policy; Bayesian Estimation. (search for similar items in EconPapers)
JEL-codes: C11 E32 E52 E62 (search for similar items in EconPapers)
Pages: [93 pages]
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
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