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On the Recovery Path during a Liquidity Trap: Do Financial Frictions Matter for Fiscal Multipliers?

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Author Info

  • Julio A. CARRILLO

    ()
    (Ghent University)

  • Celine POILLY

    ()
    (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))

Abstract

This paper investigates the effects of a fiscal stimulus when financial frictions and a liquidity trap are present. These two conditions make a government spending expansion and a reduction in capital income taxes more efficient in stimulating output. In contrast, a reduction in labor income taxes may aggravate the economic conditions. In addition, small implementation delays in government spending may result in big spending multipliers in the short run. All of these results rely partly on the dynamic interaction between inflation and the external finance premium. Lastly, simulations of the ARRA stimulus package predict that the output gains due to the presence of financial frictions may lie between 1.3 % and 2.5 % of GDP.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES) in its series Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) with number 2010034.

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Length: 56
Date of creation: 02 Sep 2010
Date of revision:
Handle: RePEc:ctl:louvir:2010034

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Keywords: Zero Lower Bound; Financial Accelerator; Fiscal Policy;

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References

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Citations

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Cited by:
  1. Julien Albertini & Arthur Poirier, 2014. "Unemployment benefits extensions at the zero lower bound on nominal interest rate," SFB 649 Discussion Papers SFB649DP2014-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  2. Flotho, Stefanie, 2012. "Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint," Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century 62028, Verein für Socialpolitik / German Economic Association.
  3. Giovanni Melina & Stefania Villa, 2013. "Fiscal Policy and Lending Relationships," IMF Working Papers 13/141, International Monetary Fund.
  4. Stefanie Flotho, 2012. "Monetary and Fiscal Policy in a Monetary Union under the Zero Lower Bound constraint," Discussion Paper Series 20, Department of International Economic Policy, University of Freiburg, revised Jun 2012.
  5. Merola, Rossana, 2014. "The role of financial frictions during the crisis: an estimated DSGE model," Dynare Working Papers 33, CEPREMAP.
  6. Javier Andrés & José Emilio Boscá & Javier Ferri, 2011. "Household Leverage and Fiscal Multipliers," Working Papers 1103, International Economics Institute, University of Valencia.
  7. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.

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