The impact of credit and fiscal policy under a liquidity trap |
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| Affiliation: | 1. Department of Mathematics, University of Macau, Macau SAR, China;2. UMacau Zhuhai Research Institute, Zhuhai, China;1. Department of International Business, Chung Yuan Christian University, Taiwan, R.O.C.;2. Gaming Teaching and Research Centre, Macao Polytechnic Institute, China;3. Department of Finance, National Central University, Taiwan, R.O.C.;1. Facultad de Economía y Negocios, Universidad de Talca, Chile;2. Facultad de Ingeniería, Universidad de Talca, Chile;3. Queensland University of Technology, School of Economics and Finance, Australia;1. School of Statistics, Beijing Normal University, China;2. Shanghai Finance Institute, China;3. National Research Center for Upper Yangtze River, Chongqing Technology and Business University, China;4. School of Economics, Chongqing Technology and Business University, China |
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| Abstract: | ![]()
This study examines the interaction of non-conventional credit policy and fiscal policy when adverse financial conditions drive the economy to a deep contraction and conventional monetary policy becomes ineffective as the policy interest rate reaches its effective lower bound. Consistent with other studies, under counter-cyclical financial intermediation costs, credit easing policies aimed at reducing credit spread ameliorate the response of the economy and lead to a faster recovery. More importantly, I find that expansionary fiscal policy during an episode of liquidity trap is associated with a large multiplier effect that prevents an otherwise deeper and longer recession. Moreover, the large impact of expansionary fiscal policy is maintained even if credit policy is already in place. |
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| Keywords: | Credit spread Financial accelerator Financial intermediation Zero lower bound Unconventional policy Fiscal policy |
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