Money-financed fiscal stimulus: The effects of implementation lag

Takayuki Tsuruga and Shota Wake

Journal of Economic Dynamics and Control, 2019, vol. 104, issue C, 132-151

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 an implementation lag in a 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 in a liquidity trap; (3) the longer the implementation lag, the deeper the recession; and (4) the depth of the recession depends on the interest semi-elasticity of money demand. Our results imply that, if money demand is unstable, the money-financed fiscal stimulus with an implementation lag may have unstable effects on output, in contrast to the debt-financed fiscal stimulus.

Keywords: Anticipation effect; Fiscal multiplier; Government spending; Seigniorage (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Working Paper: Money-financed fiscal stimulus: The effects of implementation lag (2019)
Working Paper: Money-Financed Fiscal Stimulus: The Effects of Implementation Lag (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:104:y:2019:i:c:p:132-151

DOI: 10.1016/j.jedc.2019.05.007

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