Cui, W; (2016) Monetary–fiscal interactions with endogenous liquidity frictions. European Economic Review , 87 pp. 1-25. 10.1016/j.euroecorev.2016.03.007.

Preview

Text Wei Cui 2016 Monetary fiscal interactions.pdf Download (677kB) | Preview

Abstract

I develop a tractable macro model with endogenous asset liquidity to understand monetary–fiscal interactions with liquidity frictions. Agents face idiosyncratic investment risks and meet financial intermediaries in competitive search markets. Asset liquidity is determined by the search friction and the cost of operating the financial intermediaries, and it drives the financing constraints of entrepreneurs (those who have investment projects) and their ability to invest. In contrast to private assets, government bonds are fully liquid and can be accumulated in anticipation of future opportunities to invest. A higher level of real government debt enhances the liquidity of entrepreneurs׳ portfolios and raises investment. However, the issuance of debt also raises the cost of financing government expenditures: a higher level of distortionary taxation and/or a higher real interest rate. A long-run optimal supply of government debt emerges. I also show that a proper mix of monetary and fiscal policies can avoid a deep financial recession.

Download activity - last month

Export as XMLJSONCSV

Download activity - last 12 months

Export as CSVJSONXML

Downloads by country - last 12 months

Export as CSVJSONXML

Archive Staff Only

View Item