A1150
Title: The effects of money-financed fiscal stimulus in a small open economy
Authors: Eiji Okano - Nagoya City University (Japan) [presenting]
Masataka Eguchi - Komazawa University (Japan)
Abstract: The purpose is to analyze the effects of money-financed (MF) fiscal stimulus and compare them with those resulting from a conventional debt-financed (DF) fiscal stimulus in a small open economy. We find that in normal times, MF fiscal stimulus is effective in increasing output. In a liquidity trap where the ZLB is applicable, even though the decrease in both consumer price index (CPI) inflation and output is more severe than in a closed economy when there is no fiscal response, MF fiscal stimulus is effective in stabilizing both. Accordingly, we show that even in an imperfect pass-through environment including a liquidity trap, an increase in government expenditure under MF fiscal stimulus is effective. In contrast, our policy implications concerning an increase in government expenditure under DF fiscal stimulus lie opposite to previous work assuming a closed economy. In normal times, an increase in government expenditure under the DF scheme in a small open economy is more effective than in a closed economy, although it has been argued that it is much less effective. In a liquidity trap, an increase in government expenditure under the DF scheme is less effective, also in contrast to previous work. We find that even in an imperfect pass-through environment, an increase in government expenditure under DF fiscal stimulus is not effective.
