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Money-Financed versus Debt-Financed Fiscal Stimulus with Borrowing Constraints

Author

Listed:
  • Lorenza Rossi

    (Department of Economics and Management, University of Pavia)

  • Chiara Punzo

    (Università Cattolica Sacro Cuore, Milano)

Abstract

We consider a NK-DSGE model with distortive taxation and heterogeneous agents, modeled using a modified version of the mechanism pro- posed by Bilbiie, Monacelli and Perotti (2012). Following Galì (2014), we study the effects of a shock to government purchases under two alternative financing regimes: (i) monetary financing; (ii) debt financing. Particularly, we focus on the redistributive effects of the two regimes and we find the following. Both regimes imply a redistributive effect from savers to borrowers, measured in terms of the ratio between the consumption of borrowers and that of savers. The redistribution is much greater in the money-financed fiscal stimulus, where the consumption ratio is more than three times higher than the implied one in the debt-financed fiscal stimulus. Borrowers are better o¤ also in terms of their relative labor supply and money demand. Finally, with respect to the representative agent model, the presence of borrowers enhances the impact of the fiscal intervention on aggregate output, when spending is debt financed. Remarkably, with respect to Galì (2014) the same regime implies a reduction of the debt burden instead of an increase.

Suggested Citation

  • Lorenza Rossi & Chiara Punzo, 2016. "Money-Financed versus Debt-Financed Fiscal Stimulus with Borrowing Constraints," DEM Working Papers Series 131, University of Pavia, Department of Economics and Management.
    • Handle: RePEc:pav:demwpp:demwp0131
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    References listed on IDEAS

    as
    1. Ascari, Guido & Rankin, Neil, 2013. "The effectiveness of government debt for demand management: Sensitivity to monetary policy rules," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1544-1566.
    2. Tatiana Kirsanova & Campbell Leith & Simon Wren‐Lewis, 2009. "Monetary and Fiscal Policy Interaction: The Current Consensus Assignment in the Light of Recent Developments," Economic Journal, Royal Economic Society, vol. 119(541), pages 482-496, November.
    3. Bilbiie, Florin O., 2008. "Limited asset markets participation, monetary policy and (inverted) aggregate demand logic," Journal of Economic Theory, Elsevier, vol. 140(1), pages 162-196, May.
    4. Giovanni Di Bartolomeo & Lorenza Rossi, 2007. "Effectiveness of monetary policy and limited asset market participation: Neoclassical versus Keynesian effects," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(3), pages 213-218, September.
    5. Florin O. Bilbiie & Tommaso Monacelli & Roberto Perotti, 2013. "Public Debt and Redistribution with Borrowing Constraints," Economic Journal, Royal Economic Society, vol. 0, pages 64-98, February.
    6. repec:hal:pseose:hal-01052689 is not listed on IDEAS
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    Cited by:

    1. Kazeem Abimbola Sanusi & Zandri Dickason-Koekemoer, 2023. "Fiscal and Monetary Policies Interactions in Nigeria and South Africa: Dynamic Stochastic General Equilibrium Approach," International Journal of Economics and Financial Issues, Econjournals, vol. 13(5), pages 21-31, September.
    2. Di Giorgio, Giorgio & Traficante, Guido, 2018. "Fiscal shocks and helicopter money in open economy," Economic Modelling, Elsevier, vol. 74(C), pages 77-87.

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