Liquidity Constraints and Fiscal Stabilization Policy

Mark Strøm Kristoffersen ()
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Mark Strøm Kristoffersen: Department of Economics and Business, Aarhus University, Denmark, Postal: 8000 Aarhus C, Denmark

Economics Working Papers from Department of Economics and Business Economics, Aarhus University

Abstract: It is often claimed that the presence of liquidity constrained households enhances the need for and the effects of fiscal stabilization policies. This paper studies this in a model of a small open economy with liquidity constrained households. The results show that the consequences of liquidity constraints are more complex than previously thought: The optimal stabilization policy in case of productivity shocks is independent of the liquidity constraints, and the presence of liquidity constraints tends to reduce the need for an active policy stabilizing productivity shocks.

Keywords: Liquidity constraints; Stabilization policy; Fiscal policy; Small open economy (search for similar items in EconPapers)
JEL-codes: E32 E63 F41 (search for similar items in EconPapers)
Pages: 14
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Persistent link: https://EconPapers.repec.org/RePEc:aah:aarhec:2011-07

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