EconPapers    
Economics at your fingertips  
 

Spending Multiplier during Sudden Stop Crises

Siming Liu
Additional contact information
Siming Liu: Indiana University

No 226, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: This paper studies the effect of government spending policy during sudden stop crises. Using a quarterly data-set of 30 small open economies, I find that government spending is more effective in stimulating consumption and appreciating real exchange rate during sudden stops than during normal times. To rationalize this, I build a two-sector model with the collateral constraint on external debt. During recession, an adverse international shock reduces consumption and undermines the value of collateral. The collapsing asset price in turn tightens the financial constraint, deteriorates the real absorption, and sets-in a fully-blown debt-deflation mechanism in spirit of Mendoza's 2010. In this context, an increase in government purchase exerts a counteracting force by raising asset prices and stimulating real activities. More importantly, if the government can commit certain paths of spending in the future, the expected real appreciations further relax the financial constraint today. Lastly, I use a calibrated model to explore the multiplier effect under different exchange rate regimes, the asymmetric multipliers, and the multipliers for different shock persistence.

Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
https://economicdynamics.org/meetpapers/2018/paper_226.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:226

Access Statistics for this paper

More papers in 2018 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().

 
Page updated 2019-01-31
Handle: RePEc:red:sed018:226