The Fiscal Multiplier in a Liquidity Constrained New Keynesian Economy
The Scandinavian Journal of Economics
Reason for embargo
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.
This is the author accepted manuscript. The final version is available from Wiley via the DOI in this record.
Accepted manuscript online: 11 July 2016