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On the Recovery Path during a Liquidity Trap: Do Financial Frictions Matter for Fiscal Multipliers?

Julio Carrillo () and Céline Poilly ()

No 2010034, Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: This paper investigates the effects of a fiscal stimulus when financial frictions and a liquidity trap are present. These two conditions make a government spending expansion and a reduction in capital income taxes more efficient in stimulating output. In contrast, a reduction in labor income taxes may aggravate the economic conditions. In addition, small implementation delays in government spending may result in big spending multipliers in the short run. All of these results rely partly on the dynamic interaction between inflation and the external finance premium. Lastly, simulations of the ARRA stimulus package predict that the output gains due to the presence of financial frictions may lie between 1.3 % and 2.5 % of GDP.

Keywords: Zero Lower Bound; Financial Accelerator; Fiscal Policy (search for similar items in EconPapers)
JEL-codes: E31 E44 E52 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cmp and nep-mac
Date: 2010-09-02
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Related works:
Journal Article: How do financial frictions affect the spending multiplier during a liquidity trap? (2013) Downloads
Working Paper: Online Appendix to "How do financial frictions affect the spending multiplier during a liquidity trap?" (2013) Downloads
Working Paper: How do financial frictions affect the spending multiplier during a liquidity trap? (2012) Downloads
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