The liquidity channel of fiscal policy

Christian Bayer, Benjamin Born and Ralph Luetticke

Journal of Monetary Economics, 2023, vol. 134, issue C, 86-117

Abstract: Expansionary fiscal policy lowers the return difference between public debt and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian model with incomplete markets and portfolio choice, in which public debt affects private liquidity. This liquidity channel stabilizes fixed-capital investment. We then quantify the long-run effects of higher public debt and find little crowding out of capital, but a sizable decline of the liquidity premium, which increases the fiscal burden of debt. The revenue-maximizing level of public debt is positive and has increased to 60 percent of US GDP post-2010.

Keywords: Fiscal policy and public debt; Incomplete markets; Liquidity premium; HANK; Impulse response matching (search for similar items in EconPapers)
JEL-codes: C11 D31 E21 E32 E63 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Working Paper: The Liquidity Channel of Fiscal Policy (2021)
Working Paper: The Liquidity Channel of Fiscal Policy (2020)
Working Paper: The Liquidity Channel of Fiscal Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:134:y:2023:i:c:p:86-117

DOI: 10.1016/j.jmoneco.2022.11.009

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