Hybrid seminar: Monetary financing produces neither inflation nor miraculous fiscal multipliers

In this paper, I analytically show for several New Keynesian models that money-financed fiscal stimuli have zero impact on inflation and the real economy (relative to debt-financed stimuli) when the central bank pays interest on reserves. Importantly, this result continues to hold when reserves and bonds are not perfect substitutes, and money-financed stimuli reduce funding costs for the consolidated government. Afterwards, I relax some of the assumptions behind this analytical result and investigate extensions for which this ‘irrelevance result’ is broken. I find that the quantitative impact of money-financed fiscal stimuli is substantially smaller than is found in the literature.