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Fiscal policy in a tractable liquidity - constrained economy
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Fiscal policy in a tractable liquidity - constrained economy

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  • Edouard Challe

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Xavier Ragot

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique)

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.

Suggested Citation

  • Edouard Challe & Xavier Ragot, 2011. "Fiscal policy in a tractable liquidity - constrained economy," SciencePo Working papers Main hal-03473791, HAL.
    • Handle: RePEc:hal:spmain:hal-03473791
    DOI: 10.1111/j.1468-0297.2010.02399.x
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03473791
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    More about this item

    Keywords

    Fiscal expansion; Public debt; Private sector; Private consumption;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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