Monetary financing produces neither high inflation nor miraculous fiscal multipliers

Abstract I investigate the macroeconomic impact of money-financed fiscal stimuli when they are financed by interest-paying central bank reserves. I do so in New Keynesian models where government bonds and reserves are imperfect substitutes. Despite reducing funding costs for the consolidated government, I analytically show for several models that there is zero impact from money-financed fiscal stimuli on inflation and the real economy (relative to debt-financed stimuli). Afterwards, I relax the conditions behind this ‘irrelevance result’, and show that money-financed fiscal stimuli barely increase inflation and output.