Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/57066
Authors: 
Palacio-Vera, Alfonso
Year of Publication: 
2011
Series/Report no.: 
Working paper, Levy Economics Institute 685
Abstract: 
The main purpose of this study is to explore the potential expansionary effect stemming from the monetization of debt. We develop a simple macroeconomic model with Keynesian features and four sectors: creditor households, debtor households, businesses, and the public sector. We show that such expansionary effect stems mainly from a reduction in the financial cost of servicing the public debt. The efficacy of the channel that allegedly operates through the compression of the risk/term premium on securities is found to be ambiguous. Finally, we show that a country that issues its own currency can avoid becoming stuck in a structural liquidity trap, provided its central bank is willing to monetize the debt created by a strong enough fiscal expansion.
Subjects: 
floor system
debt monetization
functional finance
policy coordination
neutral interest rate
JEL: 
E10
E12
E44
E52
E58
Document Type: 
Working Paper

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