Sala -1.26 EEG & Online
From the “helicopter money” proposal to the “modern monetary theory”, recent years have witnessed extensive debates on the possibility of using central bank money creation to fund public expenses, a.k.a. monetary financing. Some observers pointed out that such debates may have harmful political economy consequences, while others emphasized that monetary financing may be beneficial. This paper surveys 8 600 European households and uses experimental methods to answer key questions related to the monetary financing debate. First, we document that, although the level of knowledge on public finance and monetary policy is low, the majority of households have opinions on the issue. Through open-ended questions, we find that people’s first-order concern with monetary financing clearly relates to inflation. Second, we find that households’ expectations about future taxes and future inflation would not differ much in the case of monetary versus debt-financing. Third, we find that people’s views on monetary financing correlate strongly with support for budget discipline. Causality from the former aspect to the latter is suggested by the results of a randomized controlled trial using a real central bank communication on monetary financing as treatment. Fourth, we find that central banks’ communications can affect views on monetary financing, with persistent effects one month after. Overall, our findings suggest that: a) expectations would not behave as theoretical works on monetary financing assume b) views on monetary financing can have harmful political economy repercussions c) central banks can do something about it.
Authors: Cars Hommes (Bank of Canada), Julien Pinter (presenter), Isabelle Salle (Bank of Canada)
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