IDEAS home Printed from https://ideas.repec.org/p/spo/wpmain/infohdl2441-mlhspkkq98obpr7vv06u9o6kq.html
   My bibliography  Save this paper

Fiscal policy in a tractable liquidity - constrained economy: Constrained economy

Author

Listed:
  • Edouard Challe

    (Observatoire français des conjonctures économiques)

  • Xavier Ragot

    (Banque de France)

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 agentsface occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic incomefluctuations. Debt-financed increases in spending facilitate self-insurance by bond holders and maycrowd in private consumption. They also loosen the borrowing constraints faced by firms, therebyraising labour demand and possibly the real wage. Whether private consumption and wages rise orfall ultimately depends on the relative strengths of the liquidity and wealth effects that arise followingthe shock.

Suggested Citation

  • Edouard Challe & Xavier Ragot, 2011. "Fiscal policy in a tractable liquidity - constrained economy: Constrained economy," Sciences Po publications info:hdl:2441/mlhspkkq98o, Sciences Po.
    • Handle: RePEc:spo:wpmain:info:hdl:2441/mlhspkkq98obpr7vv06u9o6kq
    as

    Download full text from publisher

    File URL: https://spire.sciencespo.fr/hdl:/2441/mlhspkkq98obpr7vv06u9o6kq/resources/challe-et-al-2011-the-economic-journal-1.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    2. Ricardo J. Caballero & Emmanuel Farhi & Pierre-Olivier Gourinchas, 2008. "An Equilibrium Model of "Global Imbalances" and Low Interest Rates," American Economic Review, American Economic Association, vol. 98(1), pages 358-393, March.
    3. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
    4. Krusell, Per & Smith, Anthony A., 1997. "Income And Wealth Heterogeneity, Portfolio Choice, And Equilibrium Asset Returns," Macroeconomic Dynamics, Cambridge University Press, vol. 1(2), pages 387-422, June.
    5. Bewley, Truman, 1983. "A Difficulty with the Optimum Quantity of Money," Econometrica, Econometric Society, vol. 51(5), pages 1485-1504, September.
    6. Jonathan Heathcote, 2005. "Fiscal Policy with Heterogeneous Agents and Incomplete Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(1), pages 161-188.
    7. Heaton, John & Lucas, Deborah J, 1996. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 443-487, June.
    8. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    10. Caldara, Dario & Kamps, Christophe, 2008. "What are the effects of fiscal policy shocks? A VAR-based comparative analysis," Working Paper Series 877, European Central Bank.
    11. Olivier Blanchard & Roberto Perotti, 2002. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1329-1368.
    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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Edouard Challe & Xavier Ragot, 2011. "Fiscal Policy in a Tractable Liquidity‐Constrained Economy," Economic Journal, Royal Economic Society, vol. 121(551), pages 273-317, March.
    2. repec:hal:spmain:info:hdl:2441/mlhspkkq98obpr7vv06u9o6kq is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/6ailptt35p9f2oi4vdhvki7q7n is not listed on IDEAS
    4. Edouard Challe & Xavier Ragot, 2011. "Fiscal Policy in a Tractable Liquidity‐Constrained Economy," Economic Journal, Royal Economic Society, vol. 121(551), pages 273-317, March.
    5. Edouard Challe & Xavier Ragot, 2007. "Public spending shocks in a liquidity-constrained economy," PSE Working Papers halshs-00587686, HAL.
    6. repec:hal:spmain:info:hdl:2441/22sqasvlo496gr515iea84b26f is not listed on IDEAS
    7. Edouard Challe & Xavier Ragot, 2007. "Public spending shocks in a liquidity-constrained economy," Working Papers halshs-00587686, HAL.
    8. Challe, Edouard & Le Grand, François & Ragot, Xavier, 2013. "Incomplete markets, liquidation risk, and the term structure of interest rates," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2483-2519.
    9. Yann Algan & Xavier Ragot, 2005. "Monetary Policy with Heterogenous Agents and Credit Constraints," Sciences Po publications 2005 - 45, Sciences Po.
    10. Shafik Hebous, 2011. "The Effects Of Discretionary Fiscal Policy On Macroeconomic Aggregates: A Reappraisal," Journal of Economic Surveys, Wiley Blackwell, vol. 25(4), pages 674-707, September.
    11. Christian Bredemeier & Falko Juessen & Roland Winkler, 2020. "Fiscal Policy and Occupational Employment Dynamics," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(6), pages 1527-1563, September.
    12. Vivien Lewis & Roland Winkler, 2017. "Government Spending, Entry, And The Consumption Crowding‐In Puzzle," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(3), pages 943-972, August.
    13. Nkrumah, Kwabena Meneabe, 2013. "Effect of Fiscal Policy Shocks in Brazil," MPRA Paper 72534, University Library of Munich, Germany.
    14. Mumtaz, Haroon & Theodoridis, Konstantinos, 2020. "Fiscal policy shocks and stock prices in the United States," European Economic Review, Elsevier, vol. 129(C).
    15. repec:hal:spmain:info:hdl:2441/44p5b18ktf9akqdlpcqbsctlcs is not listed on IDEAS
    16. Ercolani Valerio & Pavoni Nicola, 2019. "The Precautionary Saving Effect of Government Consumption," The B.E. Journal of Macroeconomics, De Gruyter, vol. 19(1), pages 1-32, January.
    17. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions," Sciences Po publications info:hdl:2441/44p5b18ktf9, Sciences Po.
    18. Edouard Challe & Xavier Ragot, 2010. "Aggregate Consumption in Times of Crisis: The Role of Financial Frictions -super-1," CESifo Economic Studies, CESifo Group, vol. 56(4), pages 627-648, December.
    19. Nkrumah, Kwabena Meneabe, 2013. "Effect of Fiscal Policy Shocks in Brazil," MPRA Paper 85432, University Library of Munich, Germany.
    20. Antonello D'Alessandro & Giulio Fella & Leonardo Melosi, 2019. "Fiscal Stimulus With Learning‐By‐Doing," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 60(3), pages 1413-1432, August.
    21. Jørgensen, Peter L. & Ravn, Søren H., 2022. "The inflation response to government spending shocks: A fiscal price puzzle?," European Economic Review, Elsevier, vol. 141(C).
    22. repec:hal:spmain:info:hdl:2441/8805 is not listed on IDEAS
    23. Juan-Carlos Cordoba, 2004. "Debt-Constraints or Incomplete Markets? A Decomposition of the Wealth and Consumption Inequality in the U.S," Econometric Society 2004 Latin American Meetings 335, Econometric Society.
    24. Michal Franta, 2012. "Macroeconomic Effects of Fiscal Policy in the Czech Republic: Evidence Based on Various Identification Approaches in a VAR Framework," Working Papers 2012/13, Czech National Bank.
    25. Candelon, Bertrand & Lieb, Lenard, 2013. "Fiscal policy in good and bad times," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2679-2694.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spo:wpmain:info:hdl:2441/mlhspkkq98obpr7vv06u9o6kq. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Spire @ Sciences Po Library (email available below). General contact details of provider: https://edirc.repec.org/data/ecspofr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.