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Closed Form of Fiscal Multipliers in a DSGE model with Liquidity-Constrained households

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  • Kenichi Tamegawa

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    (Meiji University)

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    Abstract

    In this paper, we obtain the closed form of fiscal multipliers in a dynamic stochastic general equilibrium model with liquidity-constrained households. The closed form indicates that the first-period multiplier depends monotonically on the fraction of liquidity-constrained households over all the households. When this fraction is one, the maximum value of the multiplier is obtained as the inverse of one minus the labor share. This result indicates that our model has the traditional Keynesian fiscal multiplier (the inverse of one minus the marginal propensity to consume) as a special case.

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    File URL: http://www.accessecon.com/Pubs/EB/2012/Volume32/EB-12-V32-I4-P302.pdf
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    Bibliographic Info

    Article provided by AccessEcon in its journal Economics Bulletin.

    Volume (Year): 32 (2012)
    Issue (Month): 4 ()
    Pages: 3148-3157

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    Handle: RePEc:ebl:ecbull:eb-12-00558

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    Related research

    Keywords: fiscal policy; fiscal multipliers; DSGE modeling; liquidity constraint;

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    1. Jordi Gali & David López-Salido & Javier Valles, 2004. "Understanding the effects of government spending on consumption," International Finance Discussion Papers 805, Board of Governors of the Federal Reserve System (U.S.).
    2. Linnemann, Ludger, 2006. "The Effect of Government Spending on Private Consumption: A Puzzle?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1715-1735, October.
    3. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The output, employment, and interest rate effects of government consumption," Discussion Paper / Institute for Empirical Macroeconomics 25, Federal Reserve Bank of Minneapolis.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
    5. Roel Beetsma & Massimo Giuliodori, 2011. "The Effects of Government Purchases Shocks: Review and Estimates for the EU," Economic Journal, Royal Economic Society, vol. 121(550), pages F4-F32, February.
    6. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    7. Olivier Blanchard & Roberto Perotti, 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," NBER Working Papers 7269, National Bureau of Economic Research, Inc.
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