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The Fiscal Multiplier in Small Open Economy; The Role of Liquidity Frictions

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  • Jasmin Sin

Abstract

This paper studies the fiscal multiplier using a small-open-economy DSGE model enriched with financial frictions. It shows that the multiplier is large when frictions are present in domestic and international financial markets. The reason is that in the model government bonds are more liquid than private financial assets and that entrepreneurs face liquidity constraints. A bond-financed fiscal expansion eases these constraints and stimulates investment and hence growth. This mechanism, however, breaks down under the assumption of perfect international capital mobility, suggesting that conventional models which ignore the presence of frictions in international capital markets tend to underestimate the fiscal multiplier.

Suggested Citation

  • Jasmin Sin, 2016. "The Fiscal Multiplier in Small Open Economy; The Role of Liquidity Frictions," IMF Working Papers 16/138, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:16/138
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Fiscal Multiplier in Small Open Economy: The Role of Liquidity Frictions
      by Christian Zimmermann in NEP-DGE blog on 2016-10-11 19:27:15

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    Cited by:

    1. Siming Liu, 2018. "Spending Multiplier during Sudden Stop Crises," 2018 Meeting Papers 226, Society for Economic Dynamics.

    More about this item

    Keywords

    Fiscal stimulus and multipliers; Fiscal policy; Government expenditures; Liquidity; Small open economies; General equilibrium models; Sensitivity analysis; DSGE model; fiscal multiplier; small open economy; liquidity frictions;

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