 Government spending during sudden stop crisesSiming Liu () Journal of International Economics, 2022, vol. 135, issue C Abstract: This paper examines the state-dependent multipliers of government spending in sudden stop economies. First, I provide cross-country evidence that an increase in government spending is more effective in stimulating consumption and appreciating the real exchange rate in sudden stop crises than in normal times. To rationalize this, I then build a small open economy model with a collateral constraint on international borrowing. During a financial crisis, an adverse international shock reduces consumption and lowers the market value of income as collateral. The lowered income, in turn, tightens the financial constraint and sets in a debt-deflation mechanism. In this context, a fiscal expansion appreciates the real exchange rate and drives in capital flows when the financial constraint is binding, thus creating a larger multiplier on private consumption. The difference in multipliers across financial states also depends on the exchange rate environment of a country. Keywords: State-dependent multipliers; Fisher's debt-deflation; Sudden stop crisis; Downward nominal wage rigidity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:135:y:2022:i:c:s0022199622000034 DOI: 10.1016/j.jinteco.2022.103571 Access Statistics for this article Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and RodrÃguez-Clare, Andrés More articles in Journal of International Economics from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.