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Fiscal Policy in a Tractable Liquidity-Constrained Economy

Author

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  • Xavier Ragot

    (PSE - Paris School of Economics, PSE - Paris-Jourdan Sciences Economiques - ENS Paris - École normale supérieure - Paris - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique, Centre de recherche de la Banque de France - Banque de France)

  • Edouard Challe

    (Centre de recherche de la Banque de France - Banque de France, Ecole Polytechnique [Palaiseau])

Abstract

We analyse the effects of fiscal expansions when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in spending facilitate self-insurance by bond holders and may crowd in private consumption. They also loosen the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock.

Suggested Citation

  • Xavier Ragot & Edouard Challe, 2011. "Fiscal Policy in a Tractable Liquidity-Constrained Economy," Post-Print halshs-00654650, HAL.
  • Handle: RePEc:hal:journl:halshs-00654650 DOI: 10.1111/j.1468-0297.2010.10.02399.x Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00654650
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    References listed on IDEAS

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    1. Roberto Perotti, 2008. "In Search of the Transmission Mechanism of Fiscal Policy," NBER Chapters,in: NBER Macroeconomics Annual 2007, Volume 22, pages 169-226 National Bureau of Economic Research, Inc.
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    12. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
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    Citations

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    Cited by:

    1. Edouard Challe & Xavier Ragot, 2016. "Precautionary Saving Over the Business Cycle," Economic Journal, Royal Economic Society, vol. 126(590), pages 135-164, February.
    2. Shafik Hebous & Tom Zimmermann, 2016. "Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement," IMF Working Papers 16/60, International Monetary Fund.
    3. George-Marios Angeletos & Fabrice Collard & Harris Dellas & Behzad Diba, 2013. "Optimal Public Debt Management and Liquidity Provision," NBER Working Papers 18800, National Bureau of Economic Research, Inc.
    4. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo, vol. 56(4), pages 627-648, December.
    5. Ercolani, Valerio & Pavoni, Nicola, 2014. "The Precautionary Saving Effect of Government Consumption," CEPR Discussion Papers 10067, C.E.P.R. Discussion Papers.
    6. Reicher, Claire, 2014. "Systematic fiscal policy and macroeconomic performance: A critical overview of the literature," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 8, pages 1-37.
    7. António Antunes & Valerio Ercolani, 2016. "Public debt expansions and the dynamics of the household borrowing constraint," Working Papers w201618, Banco de Portugal, Economics and Research Department.
    8. Kazufumi Yamana & Makoto Nirei & Sanjib Sarker, 2016. "Time-Varying Employment Risks, Consumption Composition, and Fiscal Policy," Economics Bulletin, AccessEcon, vol. 36(2), pages 802-812.
    9. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions," Post-Print halshs-00944933, HAL.
    10. Xavier Ragot, 2012. "The economics of the laboratory mouse: where do we go from here?," Chapters,in: What’s Right with Macroeconomics?, chapter 7, pages 181-194 Edward Elgar Publishing.
    11. Real Arai & Takuma Kunieda & Keigo Nishida, 2014. "Is Public Debt Growth-Enhancing or Growth-Reducing?," KIER Working Papers 884, Kyoto University, Institute of Economic Research.
    12. Mauro Napoletano, 2017. "A Short Walk on the Wild Side: Agent-Based Models and their Implications for Macroeconomic Analysis," GREDEG Working Papers 2017-40, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    13. repec:cai:recosp:reco_hs02_0159 is not listed on IDEAS
    14. Robert Boyer, 2013. "Macroeconomics after the crisis: bringing finance back in," Chapters,in: Before and Beyond the Global Economic Crisis, chapter 4, pages 72-93 Edward Elgar Publishing.
    15. Slim Bridji & Matthieu Charpe, 2012. "Labour Market and Fiscal Policy," IHEID Working Papers 03-2012, Economics Section, The Graduate Institute of International Studies, revised 16 Feb 2012.

    More about this item

    Keywords

    Public debt; Fiscal expansions;

    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

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