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Fiscal Policy in a Tractable Liquidity-Constrained Economy

Edouard Challe () and Xavier Ragot ()

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Abstract: We analyse the effects of fiscal expansions when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous agents face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in spending facilitate self-insurance by bond holders and may crowd in private consumption. They also loosen the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage. Whether private consumption and wages rise or fall ultimately depends on the relative strengths of the liquidity and wealth effects that arise following the shock.

Keywords: Fiscal; policy (search for similar items in EconPapers)
Date: 2011-03
Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-00944925
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Published in Economic Journal, Wiley, 2011, 121 (551), pp.273-317

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Related works:
Journal Article: Fiscal Policy in a Tractable Liquidity‐Constrained Economy (2011) Downloads
Working Paper: Fiscal Policy in a Tractable Liquidity-Constrained Economy (2011)
Working Paper: Fiscal policy in a tractable liquidity - constrained economy (2011) Downloads
Working Paper: Fiscal Policy in a Tractable Liquidity-Constrained Economy (2010) Downloads
Working Paper: Fiscal policy in a tractable liquidity-constrained economy (2010) Downloads
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