The Effects of a Money-Financed Fiscal Stimulus

Recognition Program

Authors: Jordi Galí

Journal of Monetary Economics, Vol. 115, 1-19, November, 2020

I analyze the effects of a money-financed fiscal stimulus and compare them with those resulting from a conventional debt-financed stimulus. I study the effects of both a tax cut and an increase in government purchases, with and without a binding zero lower bound (ZLB) on the nominal interest rate. When the ZLB is not binding, a money-financed fiscal stimulus is shown to have much larger multipliers than a debt-financed fiscal stimulus. That difference in effectiveness persists, but is much smaller, under a binding ZLB. Nominal rigidities are shown to play a major role in shaping those effects

This paper originally appeared as Barcelona School of Economics Working Paper 786
This paper is acknowledged by the Barcelona GSE Research Recognition Program