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Why are fiscal multipliers asymmetric? The role of credit constraints

Research output: Contribution to journalArticle

Richard McManus, Fatma Gulcin Ozkan, Dawid Trzeciakiewicz

Original languageEnglish
Pages (from-to)32-69
Number of pages38
JournalECONOMICA
Volume88
Issue number349
Early online date1 Apr 2020
DOIs
Accepted/In press11 Jan 2019
E-pub ahead of print1 Apr 2020
Published3 Dec 2020

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Abstract

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.

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