Optimal Fiscal Policy and Private Sector Borrowing Constraints

Myohl, Christian (August 2018). Optimal Fiscal Policy and Private Sector Borrowing Constraints (Discussion Papers 18-22). Bern: Department of Economics

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When the transmission channel between savers and borrowing firms is disturbed, firms may find themselves borrowing-constrained. I study the optimal fiscal policy response to a tightening borrowing constraint in a simple two-period model. I find that it is not optimal to subsidize firms, although this would relax the constraint and help firms directly. Instead, the optimal response exploits the distortion caused by the borrowing constraint and reduces existing tax distortions. This result is robust to when endogenous government spending and investment are part of the government’s set of instruments.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Myohl, Christian

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Discussion Papers

Publisher:

Department of Economics

Language:

English

Submitter:

Lars Tschannen

Date Deposited:

03 Sep 2020 08:29

Last Modified:

03 Sep 2020 08:29

JEL Classification:

E62, H21

BORIS DOI:

10.7892/boris.145876

URI:

https://boris.unibe.ch/id/eprint/145876

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