2015/19 LEM Working Paper Series

Time-Varying Fiscal Multipliers in an Agent-Based Model with Credit Rationing

Mauro Napoletano, Andrea Roventini and Jean-Luc Gaffard
fiscal multipliers, agent-based models, credit-rationing, balance-sheet recession, bankruptcy shocks

  JEL Classifications
E63, E21, C63

We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how fiscal multipliers can change over the business cycle and are affected by the state of credit markets. We find that deficit-spending fiscal policy dampens the effect of bankruptcy shocks and lowers their persistence. Moreover, the size and dynamics of government spending multipli- ers are related to the degree and persistence of credit rationing in the economy. On the contrary, in presence of balanced-budget rules, output permanently falls below pre-shock levels and the ensuing multipliers fall below one and are much lower than the ones emerging from the deficit-spending policy. Finally, we show that different conditions in the credit market significantly affect the size and the evolution of fiscal multipliers.
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