The Effects of a Money-Financed Fiscal Stimulus

• Authors: Jordi Galí.
• BSE Working Paper: 786 | September 15
• Keywords: government spending , seignorage , fiscal multipliers , helicopter drop
• JEL codes: E32, E52, E62
• government spending
• seignorage
• fiscal multipliers
• helicopter drop

I analyze the effects of a fiscal stimulus financed through money creation. I study the effects of both a tax cut and an increase in government purchases, and compare them with those resulting from a conventional debt-financed stimulus, with and without a binding zero lower bound 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. The analysis points to the key role of nominal rigidities in shaping those effects.