The Fiscal Multiplier in a Liquidity‐Constrained New Keynesian Economy

Engin Kara and Jasmin Sin

Scandinavian Journal of Economics, 2018, vol. 120, issue 1, 93-123

Abstract: We study the effects of fiscal policy on the macroeconomy using a liquidity‐constrained New Keynesian model in which government bonds are liquid, and private financial assets are only partially liquid. We find that the fiscal multipliers in this economic environment are large enough for fiscal policy to be highly effective. In this model, a bond‐financed fiscal expansion can stimulate output because higher public borrowing improves liquidity by increasing the proportion of liquid assets in private‐sector wealth.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bla:scandj:v:120:y:2018:i:1:p:93-123

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