Public spending shocks in a liquidity-constrained economy

Edouard Challe () and Xavier Ragot
Additional contact information
Edouard Challe: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

PSE Working Papers from HAL

Abstract: This paper analyses the effect 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, infinitely-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. Whether private consumption and wages actually rise or fall ultimately depends on the relative strengths of the liquidity and wealth effect that are produced by the shock

Keywords: borrowing constraints; public debt; fiscal policy shocks (search for similar items in EconPapers)
Date: 2007-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00587686v1
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://shs.hal.science/halshs-00587686v1/document (application/pdf)

Related works:
Working Paper: Public spending shock in a liquidity constrained economy (2008)
Working Paper: Public spending shock in a liquidity constrained economy (2008)
Working Paper: Public spending shocks in a liquidity-constrained economy (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:psewpa:halshs-00587686

Access Statistics for this paper

More papers in PSE Working Papers from HAL
Bibliographic data for series maintained by CCSD ().