TY - JOUR
T1 - Money-financed fiscal stimulus: The effects of implementation lag
AU - Tsuruga, Takayuki
AU - Wake, Shota
PY - 2019
Y1 - 2019
N2 - 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.
AB - 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.
U2 - 10.1016/j.jedc.2019.05.007
DO - 10.1016/j.jedc.2019.05.007
M3 - Article
SN - 0165-1889
VL - 104
SP - 132
EP - 151
JO - Journal of Economic Dynamics and Control
JF - Journal of Economic Dynamics and Control
ER -