The Effect of Fiscal Programs with Money Financing and Yield Curve Control
41 Pages Posted: 2 Sep 2020
Date Written: July 24, 2020
We study monetary policy in a model where long-term interest rate variability dampens the fiscal multiplier. A fixed money supply limits this variability. Moreover, a flexible money supply rule that only responds to government spending, and is otherwise fixed, further amplifies the fiscal multiplier and improves household welfare. Yield curve control, or reserve management by the central bank to reduce long-term rate variability, is most effective when the money supply responds endogenously to support a Taylor rule interest rate policy. In the fixed and flexible money supply cases, there is limited fiscal multiplier amplification at the zero lower bound.
Keywords: Fiscal Multipliers, Helicopter Drop, Money Supply, Taylor Rule, Yield Curve Control, Zero Lower Bound
JEL Classification: E51, E52, E58, E62
Suggested Citation: Suggested Citation