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Optimal Fiscal Policy and Private Sector Borrowing Constraints

Christian Myohl

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: When the transmission channel between savers and borrowing firms is disturbed, firms may find themselves borrowing-constrained. I study the optimal fiscal policy response to a tightening borrowing constraint in a simple two-period model. I find that it is not optimal to subsidize firms, although this would relax the constraint and help firms directly. Instead, the optimal response exploits the distortion caused by the borrowing constraint and reduces existing tax distortions. This result is robust to when endogenous government spending and investment are part of the government’s set of instruments.

Keywords: Optimal fiscal policy; borrowing constraints. (search for similar items in EconPapers)
JEL-codes: E62 H21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2018-08
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