Fiscal Policy in a Tractable Liquidity-Constrained Economy

Xavier Ragot and Edouard Challe

PSE-Ecole d'économie de Paris (Postprint) from HAL

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: Public debt; Fiscal expansions (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (29)

Published in The Economic Journal, 2011, 121 (551), pp.273-317. ⟨10.1111/j.1468-0297.2010.10.02399.x⟩

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Related works:
Journal Article: Fiscal Policy in a Tractable Liquidity‐Constrained Economy (2011)
Working Paper: Fiscal policy in a tractable liquidity - constrained economy (2011)
Working Paper: Fiscal Policy in a Tractable Liquidity-Constrained Economy (2011)
Working Paper: Fiscal policy in a tractable liquidity - constrained economy (2011)
Working Paper: Fiscal Policy in a Tractable Liquidity-Constrained Economy (2010)
Working Paper: Fiscal policy in a tractable liquidity-constrained economy (2010)
Working Paper: Fiscal policy in a tractable liquidity-constrained economy (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:pseptp:halshs-00654650

DOI: 10.1111/j.1468-0297.2010.10.02399.x

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