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The Fiscal Multiplier in a Liquidity‐Constrained New Keynesian Economy

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  • Engin Kara
  • Jasmin Sin

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 model, a bond‐financed fiscal expansion can stimulate output because higher public borrowing improves liquidity by increasing the proportion of liquid assets in private‐sector wealth.

Suggested Citation

  • Engin Kara & Jasmin Sin, 2018. "The Fiscal Multiplier in a Liquidity‐Constrained New Keynesian Economy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(1), pages 93-123, January.
    • Handle: RePEc:bla:scandj:v:120:y:2018:i:1:p:93-123
    DOI: 10.1111/sjoe.12208
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    2. Konstantinou, Panagiotis Th. & Partheniou, Andromachi, 2021. "The Effects of Government Spending Over the Business Cycle: A Disaggregated Analysis for OECD and Non-OECD Countries," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 809-822.
    3. Piotr Krajewski & Agata Szymanska, 2019. "The effectiveness of fiscal policy within business cycle-Ricardians vs. non-Ricardians approach," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 19(2), pages 195-215.
    4. Shobande Olatunji Abdul, 2020. "Fiscal Rule in Africa," Open Economics, De Gruyter, vol. 3(1), pages 112-120, January.

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