The Liquidity Channel of Fiscal Policy
Christian Bayer (),
Benjamin Born and
Ralph Luetticke ()
No 8374, CESifo Working Paper Series from CESifo
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)
New Economics Papers: this item is included in nep-dge and nep-mac
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Working Paper: The Liquidity Channel of Fiscal Policy (2021)
Working Paper: The Liquidity Channel of Fiscal Policy (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_8374
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