Why are fiscal multipliers asymmetric? The role of credit constraints

TY - JOUR

T1 - Why are fiscal multipliers asymmetric?

T2 - The role of credit constraints

AU - McManus, Richard

AU - Ozkan, Fatma Gulcin

AU - Trzeciakiewicz, Dawid

N1 - This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy. Further copying may not be permitted; contact the publisher for details.

PY - 2020/4/1

Y1 - 2020/4/1

N2 - 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.

AB - 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.

U2 - 10.1111/ecca.12340

DO - 10.1111/ecca.12340

M3 - Article

SN - 0013-0427

JO - Economica

JF - Economica

ER -