Why Are Fiscal Multipliers Asymmetric? The Role of Credit Constraints

45 Pages Posted: 30 Oct 2018

See all articles by Richard McManus

Richard McManus

Canterbury Christ Church University College

F. Gulcin Ozkan

University of York

Dawid Trzeciakiewicz

Loughborough University

Date Written: October 7, 2018

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.

Keywords: fiscal policy, fiscal multipliers, housing market, collateral constraints

JEL Classification: E21, E62, H31

Suggested Citation

McManus, Richard and Ozkan, F. Gulcin and Trzeciakiewicz, Dawid, Why Are Fiscal Multipliers Asymmetric? The Role of Credit Constraints (October 7, 2018). Available at SSRN: https://ssrn.com/abstract=3262309 or http://dx.doi.org/10.2139/ssrn.3262309

Richard McManus

Canterbury Christ Church University College ( email )

North Holmes Road
Canterbury, Kent CT1 1QU
United Kingdom

F. Gulcin Ozkan (Contact Author)

University of York ( email )

Heslington
University of York
York, YO10 5DD
United Kingdom

Dawid Trzeciakiewicz

Loughborough University ( email )

Epinal Way
Loughborough, LE11 3TU
Great Britain

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