The Fiscal Multiplier in a Liquidity Constrained New Keynesian Economy
Kara, E; Sin, J
Date: 11 July 2016
Journal
The Scandinavian Journal of Economics
Publisher
Wiley
Publisher DOI
Abstract
We study the effects of fiscal policy on the macroeconomy using a liquidity constrained New Keynesian model in which government bonds are liquid and private financial assets are only partially liquid. We find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective. In this ...
We study the effects of fiscal policy on the macroeconomy using a liquidity constrained New Keynesian model in which government bonds are liquid and private financial assets are only partially liquid. We find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective. In this model, a bond-financed fiscal expansion can stimulate output since higher public borrowing improves liquidity by increasing the proportion of liquid assets in private-sector wealth.
Economics
Faculty of Environment, Science and Economy
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