How do financial frictions affect the spending multiplier during a liquidity trap?

Détails

ID Serval
serval:BIB_224B05DDD516
Type
Article: article d'un périodique ou d'un magazine.
Collection
Publications
Institution
Titre
How do financial frictions affect the spending multiplier during a liquidity trap?
Périodique
Review of Economic Dynamics
Auteur⸱e⸱s
Carrillo J. A., Poilly C.
ISSN
1094-2025
Statut éditorial
Publié
Date de publication
04/2013
Peer-reviewed
Oui
Volume
16
Numéro
2
Pages
296-311
Langue
anglais
Résumé
We show that credit market imperfections substantially increase the government-spending multiplier when the economy enters a liquidity trap. This finding is explained by the tight association between capital goods and firmsʼ collateral, a relationship that we highlight as the capital-accumulation channel. During a liquidity trap, a government spending expansion reduces the real interest rate, leading to a period of cheap credit. Entrepreneurs use this time to accumulate capital, which persistently improves their balance sheets and reduces their future costs of credit. A public spending expansion can thus encourage private investment, yielding consequently a large spending multiplier. This effect is further reinforced by Fisherʼs debt-deflation channel.
Mots-clé
Financial frictions, Tero lower bound, Fiscal policy
Web of science
Création de la notice
05/03/2013 14:15
Dernière modification de la notice
21/08/2019 5:17
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