Money-Financed Fiscal Programs: A Cautionary Tale

William B. English, Christopher Erceg and David Lopez-Salido

No 2017-060, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: A number of prominent economists and policymakers have argued that money-?nanced ?scal programs (helicopter drops) could be e?cacious in boosting output and in?ation in economies facing persistent economic weakness, very low in?ation, and signi?cant ?scal strains. We employ a fairly conventional macroeconomic model to explore the possible e?ects of such policies. While we do ?nd that money-?nanced ?scal programs, if communicated successfully and seen as credible by the public, could provide signi?cant stimulus, we underscore the risks that would be associated with such a program. These risks include persistently high in?ation if the central bank fully adhered to the program; or alternatively, that such a program would be ine?ective in providing stimulus if the public doubted the central bank?s commitment to such an extreme strategy. We also highlight how more limited forms of monetary and ?scal cooperation ? such as a promise by the central bank to be more accommodative than usual in response to ?scal stimulus ? may be more credible and easier to communicate, and ultimately more e?ective in providing economic stimulus.

Keywords: DSGE Model; Fiscal policy; Liquidity Trap; Monetary policy; currency unions (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2017-06
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2017-60

DOI: 10.17016/FEDS.2017.060

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