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Fiscal policy with credit constrained households


  • Werner Roeger
  • Jan in 't Veld


This paper explores the effects of discretionary fiscal policy in a DSGE model that explicitly models housing investment and allows for credit constrained households along the lines of the financial accelerator literature.The presence of credit constrained households raises the marginal propensity to consume out of transitory tax reductions and increases in transfers, and makes fiscal policy a more powerful tool for short run stabilisation. Fiscal policy is more effective when credit constraints increase, when measures are temporary, and when monetary policy is accommodative.This is a timely issue in the current financial crisis which can be characterised by a substantial negative demand shock and tighter credit constraints.

Suggested Citation

  • Werner Roeger & Jan in 't Veld, 2009. "Fiscal policy with credit constrained households," European Economy - Economic Papers 2008 - 2015 357, Directorate General Economic and Financial Affairs (DG ECFIN), European Commission.
  • Handle: RePEc:euf:ecopap:0357

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    References listed on IDEAS

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    16. Ramey, Valerie A. & Shapiro, Matthew D., 1998. "Costly capital reallocation and the effects of government spending," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 48(1), pages 145-194, June.
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    Cited by:

    1. Douglas Sutherland & Peter Hoeller & Balázs Égert & Oliver Röhn, 2010. "Counter-cyclical Economic Policy," OECD Economics Department Working Papers 760, OECD Publishing.
    2. Vassilis Monastiriotis, 2014. "(When) Does Austerity Work? On the Conditional Link between Fiscal Austerity and Debt Sustainability," Cyprus Economic Policy Review, University of Cyprus, Economics Research Centre, vol. 8(1), pages 71-92, June.
    3. van Riet, Ad, 2010. "Euro area fiscal policies and the crisis," Occasional Paper Series 109, European Central Bank.
    4. Tobias Cwik & Volker Wieland, 2011. "Keynesian government spending multipliers and spillovers in the euro area," Economic Policy, CEPR;CES;MSH, vol. 26(67), pages 493-549, July.
    5. Volker Wieland, 2012. "Model comparison and robustness: a proposal for policy analysis after the financial crisis," Chapters,in: What’s Right with Macroeconomics?, chapter 2, pages 33-67 Edward Elgar Publishing.
    6. Annicchiarico, Barbara & Di Dio, Fabio & Felici, Francesco, 2013. "Structural reforms and the potential effects on the Italian economy," Journal of Policy Modeling, Elsevier, vol. 35(1), pages 88-109.
    7. Günter Coenen & Christopher J. Erceg & Charles Freedman & Davide Furceri & Michael Kumhof & René Lalonde & Douglas Laxton & Jesper Lindé & Annabelle Mourougane & Dirk Muir & Susanna Mursula & Carlos d, 2012. "Effects of Fiscal Stimulus in Structural Models," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(1), pages 22-68, January.
    8. Matteo Iacoviello, 2014. "Macroeconomics of housing," Chapters,in: The Global Financial Crisis and Housing, chapter 2, pages 21-39 Edward Elgar Publishing.

    More about this item


    Fiscal Policy; Fiscal Multiplier; Government Deficits; Credit Constraint; DSGE modelling; Fiscal Policy with Credit Constrained Households; QUEST; Roeger; in 't Veld; DGSE;

    JEL classification:

    • 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
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt


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