Why are fiscal multipliers asymmetric? The role of credit constraints

TY - JOUR

T1 - Why are fiscal multipliers asymmetric? The role of credit constraints

AU - McManus, Richard

AU - Ozkan, Fatma Gulcin

AU - Trzeciakiewicz, Dawid

PY - 2020/12/3

Y1 - 2020/12/3

N2 - Recent empirical evidence strongly points to the state dependence of fiscal multipliers that are larger in recessions than in expansions. Yet standard business cycle models face great difficulty in producing such asymmetric fiscal policy effects. By incorporating endogenously binding collateral constraints into a medium scale dynamic stochastic general equilibrium model, we find that fiscal effectiveness can vary substantially across the business cycle. The key to our framework is the state-dependent nature of collateral constraints—binding in bad times while slack in good times, amplifying the effectiveness of fiscal policy and hence generating fiscal multipliers that are larger during recessions.

AB - Recent empirical evidence strongly points to the state dependence of fiscal multipliers that are larger in recessions than in expansions. Yet standard business cycle models face great difficulty in producing such asymmetric fiscal policy effects. By incorporating endogenously binding collateral constraints into a medium scale dynamic stochastic general equilibrium model, we find that fiscal effectiveness can vary substantially across the business cycle. The key to our framework is the state-dependent nature of collateral constraints—binding in bad times while slack in good times, amplifying the effectiveness of fiscal policy and hence generating fiscal multipliers that are larger during recessions.

UR - http://www.scopus.com/inward/record.url?scp=85082833304&partnerID=8YFLogxK

U2 - 10.1111/ecca.12340

DO - 10.1111/ecca.12340

M3 - Article

SN - 0013-0427

VL - 88

SP - 32

EP - 69

JO - ECONOMICA

JF - ECONOMICA

IS - 349

ER -