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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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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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Cited by:
  1. Merola, Rossana, 2014. "The role of financial frictions during the crisis: an estimated DSGE model," Dynare Working Papers 33, CEPREMAP.
  2. Giovanni MELINA & Stefania VILLA, 2012. "Fiscal policy and lending relationships," Center for Economic Studies - Discussion papers ces12.06, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
  3. Kühl, Michael, 2014. "The financial accelerator and market-based debt instruments: A role for maturities?," Discussion Papers 08/2014, Deutsche Bundesbank, Research Centre.
  4. 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.
  5. Villa, Stefania, 2013. "Financial frictions in the euro area: a Bayesian assessment," Working Paper Series 1521, European Central Bank.
  6. 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.
  7. 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.
  8. Christophe Blot & Marion Cochard & Jérôme Creel & Bruno Ducoudre & Danielle Schweisguth & Xavier Timbeau, 2014. "Fiscal consolidation in times of crisis: is the sooner really the better?," Sciences Po publications info:hdl:2441/2g7mhju69b9, Sciences Po.
  9. Javier Andrés & José Boscá & Francisco Ferri, 2012. "Household leverage and fiscal multipliers," Banco de Espa�a Working Papers 1215, Banco de Espa�a.
  10. repec:spo:wpecon:info:hdl:2441/2g7mhju69b94obeaqlen09s1au is not listed on IDEAS

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