The Fiscal Multiplier in Small Open Economy : The Role of Liquidity Frictions

Author/Editor:

Jasmin Sin

Publication Date:

July 12, 2016

Electronic Access:

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Summary:

This paper studies the fiscal multiplier using a small-open-economy DSGE model enriched with financial frictions. It shows that the multiplier is large when frictions are present in domestic and international financial markets. The reason is that in the model government bonds are more liquid than private financial assets and that entrepreneurs face liquidity constraints. A bond-financed fiscal expansion eases these constraints and stimulates investment and hence growth. This mechanism, however, breaks down under the assumption of perfect international capital mobility, suggesting that conventional models which ignore the presence of frictions in international capital markets tend to underestimate the fiscal multiplier.

Series:

Working Paper No. 16/138

Subject:

Notes:

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English

Publication Date:

July 12, 2016

ISBN/ISSN:

9781498366298/1018-5941

Stock No:

WPIEA2016138

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

34

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