IDEAS home Printed from https://ideas.repec.org/a/bba/j00007/v1y2022i1p21-28d125.html
   My bibliography  Save this article

Time to build, financial frictions, and the effectiveness of fiscal stimulus

Author

Listed:
  • Zhiming Ao

    (School of Economics, Jinan University, Guangzhou, China)

  • Ziyue Chen

    (Department of Manufacturing and Civil Engineering, Norwegian University of Science and Technology, Norway)

  • He Nie

    (Department of Economics, National University of Singapore, Singapore)

Abstract

By introducing time to build, which creates a time-lag between government investment and the accumulation of productive capital, into an analysis of fiscal stimulus to the economy with financial frictions, we find that the effectiveness of fiscal policy is dampened. While the weakening effects of time to build become significantly weaker alongside with a higher fraction of government bonds allocated to leverage-constrained banks, which can be explained by a high correlation between time to build and financial frictions in both worsening balance sheet conditions of banks. Furthermore, the stimulus effects of public investment become stronger associated with shorter time-to-build period.

Suggested Citation

  • Zhiming Ao & Ziyue Chen & He Nie, 2022. "Time to build, financial frictions, and the effectiveness of fiscal stimulus," Financial Economics Letters, Anser Press, vol. 1(1), pages 21-28, December.
    • Handle: RePEc:bba:j00007:v:1:y:2022:i:1:p:21-28:d:125
    as

    Download full text from publisher

    File URL: https://www.anserpress.org/journal/fel/1/1/3/pdf
    Download Restriction: no
    File URL: https://www.anserpress.org/journal/fel/1/1/3
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Li, Jingchao & Li, Rong, 2018. "Time-to-build, consumption complementarity, and fiscal stimulus," Economics Letters, Elsevier, vol. 163(C), pages 121-125.
    2. Thorsten Drautzburg & Harald Uhlig, 2015. "Fiscal Stimulus and Distortionary Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 894-920, October.
    3. Hafedh Bouakez & Michel Guillard & Jordan Roulleau-Pasdeloup, 2017. "Public Investment, Time to Build, and the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 60-79, January.
    4. Michael Woodford, 2011. "Simple Analytics of the Government Expenditure Multiplier," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(1), pages 1-35, January.
    5. Thorsten Drautzburg & Harald Uhlig, 2015. "Fiscal Stimulus and Distortionary Taxation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 894-920, October.
    6. Nicola Gennaioli & Alberto Martin & Stefano Rossi, 2014. "Sovereign Default, Domestic Banks, and Financial Institutions," Journal of Finance, American Finance Association, vol. 69(2), pages 819-866, April.
    7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    8. Albertini, Julien & Poirier, Arthur & Roulleau-Pasdeloup, Jordan, 2014. "The composition of government spending and the multiplier at the zero lower bound," Economics Letters, Elsevier, vol. 122(1), pages 31-35.
    9. Sarkar, Sudipto & Zhang, Chuanqian, 2015. "Investment policy with time-to-build," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 142-156.
    10. Jordan Roulleau-Pasdeloup, 2013. "The Productive Government Spending Multiplier, In and Out of The Zero Lower Bound," Working Papers 2013-02, Center for Research in Economics and Statistics.
    11. Valerie A. Ramey & Sarah Zubairy, 2018. "Government Spending Multipliers in Good Times and in Bad: Evidence from US Historical Data," Journal of Political Economy, University of Chicago Press, vol. 126(2), pages 850-901.
    12. Asimakopoulos, Panagiotis & Asimakopoulos, Stylianos, 2019. "Fiscal policy with banks and financial frictions," Journal of Financial Stability, Elsevier, vol. 40(C), pages 94-109.
    13. Sportelli, Mario & De Cesare, Luigi, 2019. "Fiscal policy delays and the classical growth cycle," Applied Mathematics and Computation, Elsevier, vol. 354(C), pages 9-31.
    14. Gertler, Mark & Kiyotaki, Nobuhiro & Queralto, Albert, 2012. "Financial crises, bank risk exposure and government financial policy," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 17-34.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Valerie A. Ramey, 2020. "The Macroeconomic Consequences of Infrastructure Investment," NBER Chapters, in: Economic Analysis and Infrastructure Investment, pages 219-268, National Bureau of Economic Research, Inc.
    2. Timothy S. Hills & Taisuke Nakata, 2018. "Fiscal Multipliers at the Zero Lower Bound: The Role of Policy Inertia," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(1), pages 155-172, February.
    3. Kirchner, Markus & Wijnbergen, Sweder van, 2016. "Fiscal deficits, financial fragility, and the effectiveness of government policies," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 51-68.
    4. Bouakez, Hafedh & Guillard, Michel & Roulleau-Pasdeloup, Jordan, 2020. "The optimal composition of public spending in a deep recession," Journal of Monetary Economics, Elsevier, vol. 114(C), pages 334-349.
    5. Eric Sims & Jonathan Wolff, 2018. "The Output And Welfare Effects Of Government Spending Shocks Over The Business Cycle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(3), pages 1403-1435, August.
    6. Kevin XD Huang & Nam T Vu, 2019. "Rare but Long-lasting Liquidity Traps and Fiscal Stimulus," Vanderbilt University Department of Economics Working Papers 19-00014, Vanderbilt University Department of Economics.
    7. Hafedh Bouakez & Michel Guillard & Jordan Roulleau-Pasdeloup, 2017. "Public Investment, Time to Build, and the Zero Lower Bound," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 60-79, January.
    8. Valerie A. Ramey, 2019. "Ten Years after the Financial Crisis: What Have We Learned from the Renaissance in Fiscal Research?," Journal of Economic Perspectives, American Economic Association, vol. 33(2), pages 89-114, Spring.
    9. Banerjee, Ryan & Zampolli, Fabrizio, 2019. "What drives the short-run costs of fiscal consolidation? Evidence from OECD countries," Economic Modelling, Elsevier, vol. 82(C), pages 420-436.
    10. Ji, Yangyang & Xiao, Wei, 2016. "Government spending multipliers and the zero lower bound," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 87-100.
    11. Coenen, Günter & Straub, Roland & Trabandt, Mathias, 2013. "Gauging the effects of fiscal stimulus packages in the euro area," Journal of Economic Dynamics and Control, Elsevier, vol. 37(2), pages 367-386.
    12. Eric M. Leeper & Nora Traum & Todd B. Walker, 2017. "Clearing Up the Fiscal Multiplier Morass," American Economic Review, American Economic Association, vol. 107(8), pages 2409-2454, August.
    13. Giambattista, Eric & Pennings, Steven, 2017. "When is the government transfer multiplier large?," European Economic Review, Elsevier, vol. 100(C), pages 525-543.
    14. Lorant Kaszab, 2016. "Rule-of-Thumb Consumers and Labor Tax Cut Policy at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 12(3), pages 353-390, September.
    15. Hur, Joonyoung & Rhee, Wooheon, 2020. "Multipliers of expected vs. unexpected fiscal shocks: The case of Korea," Economic Modelling, Elsevier, vol. 85(C), pages 244-254.
    16. Moura, Guilherme Valle, 2015. "Multiplicadores Fiscais e Investimento em Infraestrutura," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 69(1), March.
    17. Richard McManus & Gulcin Ozkan & Dawid Trzeciakiewicz, 2019. "Expansionary Contractions and Fiscal Free Lunches: Too Good To Be True?," Scandinavian Journal of Economics, Wiley Blackwell, vol. 121(1), pages 32-54, January.
    18. Gregory E. Givens, 2022. "Unemployment, Partial Insurance, And The Multiplier Effects Of Government Spending," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 63(2), pages 571-599, May.
    19. Thomas Brand, 2017. "Vitesse et composition des ajustements budgétaires en équilibre général : une analyse appliquée à la zone euro," Revue économique, Presses de Sciences-Po, vol. 68(HS1), pages 159-182.
    20. Lemoine, Matthieu & Lindé, Jesper, 2023. "Fiscal stimulus in liquidity traps: Conventional or unconventional policies?," European Economic Review, Elsevier, vol. 151(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bba:j00007:v:1:y:2022:i:1:p:21-28:d:125. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ramona Wang (email available below). General contact details of provider: https://www.anserpress.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.