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The Liquidity Channel of Fiscal Policy

Christian Bayer (), Benjamin Born and Ralph Luetticke ()

No 8374, CESifo Working Paper Series from CESifo

Abstract: We provide evidence that expansionary fiscal policy lowers the return difference between more and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice, in which public debt affects private liquidity. In this environment, the short-run fiscal multiplier is amplified by the countercyclical liquidity premium. This liquidity channel stabilizes investment and crowds in consumption. We then quantify the long-run effects of higher public debt, and find a sizable decline of the liquidity premium, increasing the fiscal burden of debt, but little crowding out of capital.

Keywords: fiscal policy; liquidity premium; business cycles; Bayesian estimation; incomplete markets; HANK (search for similar items in EconPapers)
JEL-codes: C11 D31 E32 E63 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (4) Track citations by RSS feed

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Working Paper: The Liquidity Channel of Fiscal Policy (2021) Downloads
Working Paper: The Liquidity Channel of Fiscal Policy (2020) Downloads
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