Why are fiscal multipliers asymmetric? The role of credit constraints

Journal article


McManus, R., Ozkan, G. and Trzeciakiewicz, D. 2019. Why are fiscal multipliers asymmetric? The role of credit constraints. Economica. 88 (349), pp. 32-69. https://doi.org/10.1111/ecca.12340
AuthorsMcManus, R., Ozkan, G. and Trzeciakiewicz, D.
Abstract

Recent empirical evidence strongly points to the state-dependence of fiscal multipliers which 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 DSGE 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.

KeywordsFiscal multipliers; Finance; Business models
Year2019
JournalEconomica
Journal citation88 (349), pp. 32-69
PublisherWiley-Blackwell
ISSN0013-0427
Digital Object Identifier (DOI)https://doi.org/10.1111/ecca.12340
Official URLhttps://doi.org/10.1111/ecca.12340
Publication dates
Online01 Apr 2020
PrintJan 2021
Publication process dates
Deposited29 Jan 2019
Accepted11 Jan 2019
Accepted author manuscript
File Access Level
Open
Output statusPublished
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