Public spending, currency mismatch and financial frictions

Marie-Pierre Hory, Grégory Levieuge and Daria Onori

Journal of International Money and Finance, 2021, vol. 116, issue C

Abstract: In this paper, we demonstrate that the size of the fiscal multiplier depends both on currency mismatch and home bias. Our demonstration is based on a real two-country dynamic stochastic general equilibrium model with incomplete and imperfect international financial markets, external debt and domestic financial frictions. We show that if home bias is high, the terms of trade improve following a fiscal stimulus. This reduces the private real debt burden denominated in foreign currency, decreases the external finance premium born by firms, and stimulates investment. Thus, the larger the proportion of firms’ debt denominated in foreign currency is, the higher the fiscal multiplier. In contrast, the terms of trade deteriorate when home bias is low. This increases the real debt burden and external finance premium. Hence, in this case, the fiscal multiplier decreases as the share of firms’ debt denominated in foreign currency increases.

Keywords: Fiscal multiplier; Terms of trade; Currency mismatch; DSGE model; Financial frictions (search for similar items in EconPapers)
JEL-codes: E62 F34 F41 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0261560621000644
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Public spending, currency mismatch and financial frictions (2021)
Working Paper: Public spending, currency mismatch and financial frictions (2021)
Working Paper: Public spending, currency mismatch and financial frictions (2021)
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:jimfin:v:116:y:2021:i:c:s0261560621000644

DOI: 10.1016/j.jimonfin.2021.102413

Access Statistics for this article

Journal of International Money and Finance is currently edited by J. R. Lothian

More articles in Journal of International Money and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().