Borrowing constrained Agents and Redistributive Effect of a Money-Financed Fiscal Stimulus
We consider a NK-DSGE model with heterogeneous agents and dis- tortive taxation, together with imperfectly competitive goods markets and sticky prices. Heterogeneous agents are modeled using a modified version of the mechanism proposed by Bilbiie, Monacelli and Perotti (2012). Fol- lowing Galì (2014), we study the e¤ects of a shock to government pur- chases under two alternative financing regimes: (i) monetary financing and (ii) debt financing, particularly focusing on the redistributive e¤ects of the two regimes. We find the following. Both regimes imply a redis- tributive e¤ect from savers to borrowers, measured in terms of the ratio between the consumption of borrowers and that of savers. The redistri- bution 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. The money-financed fiscal stimulus also implies that borrowers supply much less labor and demand much more money than savers.
Area: Young Economists Session (YES award)
Keywords: seignorage, government spending, heterogeneous households, distortive taxation
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