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Public Spending Shocks in a Liquidity Constrained Economy

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PublicSpendingShocks.pdf (186.0Kb)
Date
2007-12
Dewey
Macroéconomie
Sujet
Public debt; Fiscal policy shocks; Borrowing constraints
JEL code
E21; E62
Conference name
European Economic Association & Econometric Society : Parallel Meetings
Conference date
08-2008
Conference city
Milan
Conference country
Italie
URI
https://basepub.dauphine.fr/handle/123456789/4075
Collections
  • LEDa : Publications
Metadata
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Author
Ragot, Xavier
Challe, Edouard
Type
Communication / Conférence
Item number of pages
19
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.

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