Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/223446
Authors: 
Bayer, Christian
Born, Benjamin
Luetticke, Ralph
Year of Publication: 
2020
Series/Report no.: 
CESifo Working Paper No. 8374
Abstract: 
We provide evidence that expansionary fiscal policy lowers the return difference between more and less liquid assets—the liquidity premium. We rationalize this finding in an estimated heterogeneous-agent New-Keynesian (HANK) model with incomplete markets and portfolio choice, in which public debt affects private liquidity. In this environment, the short-run fiscal multiplier is amplified by the countercyclical liquidity premium. This liquidity channel stabilizes investment and crowds in consumption. We then quantify the long-run effects of higher public debt, and find a sizable decline of the liquidity premium, increasing the fiscal burden of debt, but little crowding out of capital.
Subjects: 
fiscal policy
liquidity premium
business cycles
Bayesian estimation
incomplete markets
HANK
JEL: 
C11
D31
E32
E63
Document Type: 
Working Paper

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