Money-financed fiscal programs: A cautionary tale
English, WIlliam B.; Erceg, Christopher J.; Lopez-Salido, David | June 2017
Abstract
A number of prominent economists and policymakers have argued that money-financed fiscal programs (helicopter drops) could be efficacious in boosting output and inflation in economies facing persistent economic weakness, very low inflation, and significant fiscal strains. The authors employ a fairly conventional macroeconomic model to explore the possible effects of such policies. While they do find that money-financed fiscal programs, if communicated successfully and seen as credible by the public, could provide significant stimulus, they underscore the risks that would be associated with such a program. These risks include persistently high inflation if the central bank fully adhered to the program; or alternatively, that such a program would be ineffective in providing stimulus if the public doubted the central bank’s commitment to such an extreme strategy. The authors also highlight how more limited forms of monetary and fiscal cooperation – such as a promise by the central bank to be more accommodative than usual in response to fiscal stimulus – may be more credible and easier to communicate, and ultimately more effective in providing economic stimulus
Citation
English, WIlliam B.; Erceg, Christopher J.; Lopez-Salido, David. 2017. Money-financed fiscal programs: A cautionary tale. © Brookings India. http://hdl.handle.net/11540/7324.Keywords
International Financial Market
Multilateral Financial Institutions
Economic Recession
Market
Crisis
Economic indicators
Growth models
Gross domestic product
Macroeconomics
Economic forecast
Financial Stability
Financial Management System
Financial Restructuring
Capital Market Development
Market Development
Economics
Erosion
International Economics
Macroeconomic
Macroeconomic Analysis
Performance Evaluation
Impact Evaluation
Foreign and Domestic Financing
Business recessions
Multilateral development banks
Regulatory reform
Capital
Exports
Economic development projects
Economic policy
Economic forecasting
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