Short and Long Term Analysing the Effect of Government's Financing through Inflation Tax Using New Keynesian Approach

The purpose of this study is to investigate wheatear fiscal expansion of monetary policy leads to inflation and what are its short-term and long-term consequences on the economy. The results showed that the consumption, production, and investment variables will be negatively affected by this mode of financing in the long run. The findings of policy shock functions indicate that increasing in the money stock leads to increase in the short term investment but reducing household labor hours will reduce production because of inflation. For example, increasing in the amount of a standard deviation would increase the inflation rate by 1. 157 % as well as it would reduce household labor hours, real money balance, production and consumption respectively by 0. 062%, 0. 157%, 0. 0368%, and 0. 157%. On the contrary, this policy will increase capital by 0. 264% and investment by 6. 3%.