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The Effects of a Money-Financed Fiscal Stimulus in a Small Open Economy

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  • Eiji Okano

    (Nagoya City University)

  • Masataka Eguchi

    (Komazawa University)

Abstract

We construct a small open economy model to analyze the effects of a money-financed fiscal stimulus compared with a conventional debt-financed fiscal stimulus in a liquidity trap. By developing a closed economy model, Gali (J Monet Econ 115:1–19, 2020) highlights the effectiveness of an increase in government expenditure in the debt-financed fiscal stimulus case. However, the money-financed fiscal stimulus is more effective at stabilizing output and inflation in a small open economy than in a closed economy. An increase in government expenditure in the case of the debt-financed fiscal stimulus is less effective, irrespective of nominal exchange rate pass-through, in a small open economy.

Suggested Citation

  • Eiji Okano & Masataka Eguchi, 2024. "The Effects of a Money-Financed Fiscal Stimulus in a Small Open Economy," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 72(3), pages 1212-1237, September.
    • Handle: RePEc:pal:imfecr:v:72:y:2024:i:3:d:10.1057_s41308-023-00219-6
    DOI: 10.1057/s41308-023-00219-6
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    Cited by:

    1. Ida Daisuke & Okano Mitsuhiro, 2024. "Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 24(2), pages 883-928.
    2. 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.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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