The Effects of a Money-Financed Fiscal Stimulus in a Small Open Economy

Eiji Okano () and Masataka Eguchi
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Masataka Eguchi: Komazawa University

IMF Economic Review, 2024, vol. 72, issue 3, No 9, 1212-1237

Abstract: Abstract We construct a small open economy model to analyze the effects of a money-financed fiscal stimulus compared with a conventional debt-financed fiscal stimulus in a liquidity trap. By developing a closed economy model, Gali (J Monet Econ 115:1–19, 2020) highlights the effectiveness of an increase in government expenditure in the debt-financed fiscal stimulus case. However, the money-financed fiscal stimulus is more effective at stabilizing output and inflation in a small open economy than in a closed economy. An increase in government expenditure in the case of the debt-financed fiscal stimulus is less effective, irrespective of nominal exchange rate pass-through, in a small open economy.

JEL-codes: E31 E32 E52 E62 F41 (search for similar items in EconPapers)
Date: 2024
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Working Paper: The Effects of Money-financed Fiscal Stimulus in a Small Open Economy (2021)
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DOI: 10.1057/s41308-023-00219-6

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