The effects of government spending in a model with a borrowing constraint

Yoonseok Choi

Economics Bulletin, 2025, vol. 45, issue 1, 230 - 236

Abstract: This paper explores the effects of government spending in a dynamic macroeconomic model that features a borrowing constraint as a financial friction. The main result from Bayesian estimation with U.S. data shows that dynamic response of output in the model with friction remains lower than that in the standard model without friction during transition period. This result translates into smaller output multipliers at all horizons. The takeaway from all the analyses is that considering financial frictions merits further analyses to provide a better understanding of the effects of various fiscal policies.

Keywords: Financial friction; borrowing constraint; government spending; present-value multipliers (search for similar items in EconPapers)
JEL-codes: E3 E6 (search for similar items in EconPapers)
Date: 2025-03-30
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