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Fiscal Multiplier in a Credit-Constrained New Keynesian Economy

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  • Engin Kara

    ()

  • Jasmin Sin

Abstract

Using a dynamic stochastic general equilibrium (DSGE) model that accounts for credit constraints, we study the effects of fiscal stimulus on the macroeconomy. We show that the presence of credit constraints results in larger fiscal multipliers than indicated by the standard DSGE models. If credit-crunch conditions persist, the multipliers become large enough for fiscal policy to be highly effective.

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File URL: http://www.efm.bris.ac.uk/economics/working_papers/pdffiles/dp12634.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Bristol, UK in its series Bristol Economics Discussion Papers with number 12/634.

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Length: 37 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:bri:uobdis:12/634

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Keywords: DSGE models; Monetary Policy; Fiscal Policy; Liquidity Trap; Credit constraints;

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References

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  1. Galí, Jordi & López-Salido, David & Vallés, Javier, 2004. "Understanding the effects of government spending on consumption," Working Paper Series, European Central Bank 0339, European Central Bank.
  2. S. Rao Aiyagari & Lawrence J. Christiano & Martin Eichenbaum, 1990. "The Output, Employment, and Interest Rate Effects of Government Consumption," NBER Working Papers 3330, National Bureau of Economic Research, Inc.
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  7. Andrew Levin & Christopher J. Erceg & Dale W. Henderson, 1999. "Optimal Monetary Policy with Staggered Wage and Price Contracts," Computing in Economics and Finance 1999, Society for Computational Economics 1151, Society for Computational Economics.
  8. Lawrence J. Christiano & Martin Eichenbaum & Sergio Rebelo, 2010. "When is the government spending multiplier large?," CQER Working Paper, Federal Reserve Bank of Atlanta 2010-01, Federal Reserve Bank of Atlanta.
  9. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  10. Valerie A. Ramey, 2011. "Can Government Purchases Stimulate the Economy?," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 49(3), pages 673-85, September.
  11. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  12. Gauti B. Eggertsson, 2009. "What fiscal policy is effective at zero interest rates?," Staff Reports, Federal Reserve Bank of New York 402, Federal Reserve Bank of New York.
  13. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2011. "The great escape? A quantitative evaluation of the Fed’s liquidity facilities," Staff Reports, Federal Reserve Bank of New York 520, Federal Reserve Bank of New York.
  14. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, American Economic Association, vol. 97(3), pages 586-606, June.
  15. Stephanie Schmitt-Grohé & Martín Uribe, 2006. "Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version," NBER Working Papers 12402, National Bureau of Economic Research, Inc.
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Cited by:
  1. Engin Kara & Jasmin Sin, 2013. "Liquidity, Quantitative Easing and Optimal Monetary Policy," Bristol Economics Discussion Papers, Department of Economics, University of Bristol, UK 13/635, Department of Economics, University of Bristol, UK.

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