Approaching Covid-19, there were changing roles and expectations of central banks. After the global financial crisis, there were many learnings about monetary policy tools. Identifying the optimal monetary policy tool is as much dependent on economics as it is on politics.
This research uses a simple closed-economy DSGE model with MIU (money-in-the-utility) and Calvo pricing. It considers two distinct financing regimes for government expenditure:
- Debt financing (DF): Government issues bonds, central bank employs Taylor rule
- Monetary financing (MF): Central bank creates money to finance government spending, gives up Taylor rule
By replicating Gali (2020), fitted to the SA economy, this research explores the feasibility on monetary financing for South Africa.