Public Spending Shocks in a Liquidity Constrained Economy
Ragot, Xavier; Challe, Edouard (2007-12), Public Spending Shocks in a Liquidity Constrained Economy, European Economic Association & Econometric Society : Parallel Meetings, 2008-08, Milan, Italie
TypeCommunication / Conférence
Conference titleEuropean Economic Association & Econometric Society : Parallel Meetings
MetadataShow full item record
Abstract (EN)This paper analyses the effects of transitory increases in government spending when public debt is used as liquidity by the private sector. Aggregate shocks are introduced into an incomplete-market economy where heterogenous, infitely-lived households face occasionally binding borrowing constraints and store wealth to smooth out idiosyncratic income fluctuations. Debt-financed increases in public spending facilitate self-insurance by bond holders and may crowd in private consumption. The implied higher stock of liquidity also loosens the borrowing constraints faced by firms, thereby raising labour demand and possibly the real wage.
Subjects / KeywordsPublic debt; Fiscal policy shocks; Borrowing constraints
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