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Fiscal policy in a tractable liquidity - constrained economy

Edouard Challe () and Xavier Ragot ()

Sciences Po publications from Sciences Po

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 agentsface occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic incomefluctuations. Debt-financed increases in spending facilitate self-insurance by bond holders and maycrowd in private consumption. They also loosen the borrowing constraints faced by firms, therebyraising labour demand and possibly the real wage. Whether private consumption and wages rise orfall ultimately depends on the relative strengths of the liquidity and wealth effects that arise followingthe shock

Keywords: Fiscal expansion; Public debt; Private sector; Private consumption (search for similar items in EconPapers)
Date: 2011-02
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Published in The Economic Journal, 2011, vol. 121, 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)
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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