Public spending shocks in a liquidity-constrained economy
This paper analyses the effect of transitory increases in government spending when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous, infinitely-lived households face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self-insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effect that are produced by the shock
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- George-Marios Angeletos & Vasia Panousi, 2007.
"Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets,"
NBER Working Papers
13136, National Bureau of Economic Research, Inc.
- Vasia Panousi & George-Marios Angeletos, 2007. "Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets," 2007 Meeting Papers 545, Society for Economic Dynamics.
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