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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.

Suggested Citation

  • Engin Kara & Jasmin Sin, 2012. "Fiscal Multiplier in a Credit-Constrained New Keynesian Economy," Bristol Economics Discussion Papers 12/634, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:12/634
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    Cited by:

    1. Marco Del Negro & Gauti Eggertsson & Andrea Ferrero & Nobuhiro Kiyotaki, 2017. "The Great Escape? A Quantitative Evaluation of the Fed's Liquidity Facilities," American Economic Review, American Economic Association, vol. 107(3), pages 824-857, March.
    2. António Afonso & Jaromír Baxa & Michal Slavík, 2018. "Fiscal developments and financial stress: a threshold VAR analysis," Empirical Economics, Springer, vol. 54(2), pages 395-423, March.
    3. Engin Kara & Jasmin Sin, 2013. "Liquidity, Quantitative Easing and Optimal Monetary Policy," Bristol Economics Discussion Papers 13/635, School of Economics, University of Bristol, UK.
    4. Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions," IMF Working Papers 2016/138, International Monetary Fund.
    5. DJINKPO, Medard, 2019. "A DSGE model for Fiscal Policy Analysis in The Gambia," MPRA Paper 97874, University Library of Munich, Germany, revised 30 Dec 2019.

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    More about this item

    Keywords

    DSGE models; Monetary Policy; Fiscal Policy; Liquidity Trap; Credit constraints;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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