Effect of Government Transfer on Money Supply: A Closer Look into the Interaction Between Monetary and Fiscal Policy

Ahmed Mehedi Nizam

MPRA Paper from University Library of Munich, Germany

Abstract: Although government transfer is a well-known fiscal variable, it can significantly influence the overall supply of money in the economy. Beneficiaries of government transfer program will consume a portion of it while the rest is saved and these initial savings will then be amplified inside the economy through the multiplier effect. Apart from consumption and savings a portion of government transfer will return to government in the form of taxes. Here, in the first place, we intuitively calculate the contribution of government transfer on private consumption, households' savings, government tax revenue and money supply. In the next step we provide a micro-foundation for our intuitive reasoning using a simple endowment economy with finitely lived households. Finally, we empirically calculate our proposed multipliers using impulse response analysis under structural panel VAR framework. Response of money supply to changes in government transfer uncovers a channel through which monetary and fiscal policy may interact. Moreover, variance decomposition of money supply indicates that a significant portion of variance in money supply can be explained in terms of government transfer under structural panel VAR framework.

Keywords: Government transfer; money supply; fiscal policy; monetary policy; interaction between monetary and fiscal policy (search for similar items in EconPapers)
JEL-codes: E52 E62 (search for similar items in EconPapers)
Date: 2021-08-26
New Economics Papers: this item is included in nep-cba, nep-isf, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:109394

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