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Money-Financed Fiscal Programs : A Cautionary Tale

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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.

Suggested Citation

  • William B. English & Christopher J. Erceg & J. David López-Salido, 2017. "Money-Financed Fiscal Programs : A Cautionary Tale," Finance and Economics Discussion Series 2017-060, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2017-60
    DOI: 10.17016/FEDS.2017.060
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    1. Government and central bank coordination in a low inflation world
      by Giulia Bellocchio in TVHE on 2019-08-23 20:17:54

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    Cited by:

    1. Chiara Punzo & Lorenza Rossi, 2019. "The Redistributive Effects of a Money-Financed Fiscal Stimulus," DEM Working Papers Series 168, University of Pavia, Department of Economics and Management.
    2. Tsuruga, Takayuki & Wake, Shota, 2019. "Money-financed fiscal stimulus: The effects of implementation lag," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 132-151.
    3. Mao, Ruoyun & Shen, Wenyi & Yang, Shu-Chun S., 2023. "Uncertain policy regimes and government spending effects," European Economic Review, Elsevier, vol. 152(C).
    4. Punzo Chiara, & Rossi Lorenza, 2021. "Is a Money-financed Fiscal Stimulus Desirable?," Working papers 818, Banque de France.
    5. Thomas J. Carter & Rhys R. Mendes, 2020. "The Power of Helicopter Money Revisited: A New Keynesian Perspective," Discussion Papers 2020-1, Bank of Canada.
    6. Marco Lorusso & Francesco Ravazzolo & Claudia Udroiu, 2024. "Fiscal stimuli: Monetary versus Fiscal Financing," BEMPS - Bozen Economics & Management Paper Series BEMPS105, Faculty of Economics and Management at the Free University of Bozen.
    7. Ma, Yong & Lv, Lin, 2022. "Money, debt, and the effects of fiscal stimulus," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 152-178.

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    More about this item

    Keywords

    DSGE Model; Fiscal policy; Liquidity Trap; Monetary policy; currency unions;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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