Fiscal Policy in a Tractable Liquidity‐Constrained Economy
AbstractWe analyse the effects of fiscal expansions when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt‐financed increases in spending facilitate self‐insurance by bond holders and may crowd in private consumption. They also loosen the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock.
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Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 121 (2011)
Issue (Month): 551 (March)
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Other versions of this item:
- Challe, E. & Ragot, X., 2010. "Fiscal Policy in a Tractable Liquidity-Constrained Economy," Working papers 297, Banque de France.
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
- Slim Bridji & Matthieu Charpe, 2012. "Labour Market and Fiscal Policy," IHEID Working Papers 03-2012, Economics Section, The Graduate Institute of International Studies, revised 16 Feb 2012.
- Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo, vol. 56(4), pages 627-648, December.
- George-Marios Angeletos & Fabrice Collard & Harris Dellas & Behzad Diba, 2013. "Optimal Public Debt Management and Liquidity Provision," NBER Working Papers 18800, National Bureau of Economic Research, Inc.
- Xavier Ragot & Edouard Challe, 2011.
"Precautionary Saving over the Business Cycle,"
2011 Meeting Papers
517, Society for Economic Dynamics.
- Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers 884, Kyoto University, Institute of Economic Research.
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