Bayer, Christian;
Born, Benjamin;
Luetticke, Ralph;
(2020)
The Liquidity Channel of Fiscal Policy.
(CESifo Working Paper
8374).
SSRN: Amsterdam, Netherlands.
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Abstract
We provide evidence that expansionary fiscal policy lowers the return difference between more and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice, in which public debt affects private liquidity. In this environment, the short-run fiscal multiplier is amplified by the countercyclical liquidity premium. This liquidity channel stabilizes investment and crowds in consumption. We then quantify the long-run effects of higher public debt, and find a sizable decline of the liquidity premium, increasing the fiscal burden of debt, but little crowding out of capital.
| Type: | Working / discussion paper |
|---|---|
| Title: | The Liquidity Channel of Fiscal Policy |
| Open access status: | An open access version is available from UCL Discovery |
| DOI: | 10.2139/ssrn.3633659 |
| Publisher version: | http://dx.doi.org/10.2139/ssrn.3633659 |
| Language: | English |
| Additional information: | This version is the version of record. For information on re-use, please refer to the publisher’s terms and conditions. |
| Keywords: | fiscal policy, liquidity premium, business cycles, Bayesian estimation, incomplete markets, HANK |
| UCL classification: | UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics UCL > Provost and Vice Provost Offices > UCL SLASH UCL |
| URI: | https://discovery-pp.ucl.ac.uk/id/eprint/10158367 |
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