June 2017

Money-Financed Fiscal Programs: A Cautionary Tale

William B. English, Christopher J. Erceg, and David Lopez-Salido


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. We employ a fairly conventional macroeconomic model to explore the possible effects of such policies. While we do find that money-financed fiscal programs, if communicated successfully and seen as credible by the public, could provide significant stimulus, we 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. We 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.

Accessible materials (.zip)

Keywords: DSGE Model, Fiscal policy, Liquidity Trap, Monetary policy

DOI: https://doi.org/10.17016/FEDS.2017.060

PDF: Full Paper

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Last Update: March 18, 2022