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Money, debt, and the effects of fiscal stimulus

Yong Ma and Lin Lv

Economic Analysis and Policy, 2022, vol. 73, issue C, 152-178

Abstract: A dynamic stochastic general equilibrium (DSGE) model where money and public debt play crucial roles in influencing the effects and transmission mechanisms of fiscal stimulus was developed in this paper. The model was estimated using data from the Chinese economy and then used to analyse the economic and financial dynamics and effects of fiscal stimulus under different fiscal financing scenarios. The simulation results revealed that, contrary to previous findings, a money-financed stimulus is not output-promoting and may lead to significant fluctuations in the main economic and financial variables. Meanwhile, despite the adverse effect of a high-debt environment on its short-term effects, expanded government spending stimulus engenders long-term enhancements of fiscal effectiveness at higher levels of public debt. As for tax cut stimulus, the short-term impact on promoting output is improved under higher public debt, whereas the long-term adverse effect is strengthened as public debt grows.

Keywords: Fiscal stimulus; Fiscal financing; Public debt; Macroeconomic dynamics (search for similar items in EconPapers)
JEL-codes: E32 E62 H30 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.eap.2021.11.005

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