Monetary–fiscal interactions with endogenous liquidity frictions
Wei Cui
European Economic Review, 2016, vol. 87, issue C, 1-25
Abstract:
I develop a tractable macro model with endogenous asset liquidity to understand monetary–fiscal interactions with liquidity frictions. Agents face idiosyncratic investment risks and meet financial intermediaries in competitive search markets. Asset liquidity is determined by the search friction and the cost of operating the financial intermediaries, and it drives the financing constraints of entrepreneurs (those who have investment projects) and their ability to invest. In contrast to private assets, government bonds are fully liquid and can be accumulated in anticipation of future opportunities to invest. A higher level of real government debt enhances the liquidity of entrepreneurs׳ portfolios and raises investment. However, the issuance of debt also raises the cost of financing government expenditures: a higher level of distortionary taxation and/or a higher real interest rate. A long-run optimal supply of government debt emerges. I also show that a proper mix of monetary and fiscal policies can avoid a deep financial recession.
Keywords: Liquidity frictions; Monetary and fiscal interactions (search for similar items in EconPapers)
JEL-codes: E20 E40 E50 E60 G10 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0014292116300599
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:87:y:2016:i:c:p:1-25
DOI: 10.1016/j.euroecorev.2016.03.007
Access Statistics for this article
European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer
More articles in European Economic Review from Elsevier
Bibliographic data for series maintained by Catherine Liu ().