The Liquidity Channel of Fiscal Policy

Christian Bayer, Benjamin Born and Ralph Luetticke

No 8374, CESifo Working Paper Series from CESifo

Abstract: We provide evidence that expansionary fiscal policy lowers the return difference between more and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice, in which public debt affects private liquidity. In this environment, the short-run fiscal multiplier is amplified by the countercyclical liquidity premium. This liquidity channel stabilizes investment and crowds in consumption. We then quantify the long-run effects of higher public debt, and find a sizable decline of the liquidity premium, increasing the fiscal burden of debt, but little crowding out of capital.

Keywords: fiscal policy; liquidity premium; business cycles; Bayesian estimation; incomplete markets; HANK (search for similar items in EconPapers)
JEL-codes: C11 D31 E32 E63 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: The liquidity channel of fiscal policy (2023)
Working Paper: The Liquidity Channel of Fiscal Policy (2021)
Working Paper: The Liquidity Channel of Fiscal Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8374

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