Citation

Discussion Paper Details

Please find the details for DP12394 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Financial Fragility and the Keynesian Multiplier

Author(s): Christiaan van der Kwaak and Sweder van Wijnbergen

Publication Date: October 2017

Keyword(s): Financial Intermediation, Fiscal policy, Macrofinancial Fragility and Sovereign Default Risk

Programme Area(s): International Macroeconomics and Finance

Abstract: Abstract We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12394

Bibliographic Reference

van der Kwaak, C and van Wijnbergen, S. 2017. 'Financial Fragility and the Keynesian Multiplier'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12394