A Money‐Financed Fiscal Stimulus: Redistribution and Social Welfare

Abstract

We analyze the redistribution channel of a money‐financed fiscal stimulus (MFFS) versus debt‐financed fiscal stimulus (DFFS) in a Borrower–Saver framework. The redistribution channel is larger when we consider an MFFS and borrowers are the main beneficiaries. A liquidity trap scenario amplifies the differences between an MFFS and a DFFS. The redistribution channel makes an MFFS effective at having an expansionary effect in the medium run, despite the adverse scenario. We show, however, that an MFFS increases the consumption gap between the two agents by redistributing income from savers to borrowers. Thus, an MFFS results detrimental for welfare when the welfare function is approximated around the efficient steady state.