DP10819 | Money Creation: Tax or Public Liquidity?


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When the nominal return on all public liabilities is allowed to adjust to changing market conditions, or the central bank has access to unlimited open market operations, money growth is likely to stimulate output. This is shown in the model used by Lucas in his Nobel Prize Lecture as an example of the non neutral effects of anticipated monetary expansions. A rise in net outside assets increases households' incentives to work through a reallocation of consumption across periods. This result survives with non interest-bearing cash when the latter does not generate relevant distortions.