Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/235238 
Year of Publication: 
2021
Series/Report no.: 
ifo Working Paper No. 351
Publisher: 
ifo Institute - Leibniz Institute for Economic Research at the University of Munich, Munich
Abstract: 
We provide evidence that expansionary fiscal policy lowers return differences between public debt and less liquid assets-the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian model with incomplete markets and portfolio choice, in which public debt affects private liquidity. This liquidity channel stabilizes fixed-capital investment. We then quantify the long-run effects of higher public debt and find little crowding out of capital, but a sizable decline of the liquidity premium, which increases the fiscal burden of debt. We show that the revenue-maximizing level of public debt is positive and has increased to 60 percent of GDP post-2010.
Subjects: 
Business cycles
fiscal policy
HANK
incomplete markets
liquidity premium
public debt
JEL: 
C11
D31
E21
E32
E63
Document Type: 
Working Paper

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