The impact of liquidity constraints on the effectiveness of fiscal policy: evidence from Poland
Abstract
The aim of the paper is to estimate the impact of the rapid worsening of households’ access to credit in Poland on the effects of fiscal policy. The novelty of our study is that it extends the analysis of liquidity constrained households’ impact on fiscal multipliers to Central and Eastern European country, where households access to credit is relatively limited and therefore the potential impact of liquidity constrained households on fiscal multipliers is stronger than the existing literature for highly developed economies indicates. The empirical analysis is based on the theoretical model with heterogenous households. We found that the increase in the percentage of liquidity constrained households led to the substantial rise in fiscal multipliers, and thus the increase of effectiveness of Polish fiscal policy. The study indicates that before the worsening of households’ access to loans, the contemporaneous government spending multiplier was relatively low, whereas after a sharp increase in interest rates, contemporaneous government multiplier exceeded one. What is more, our study shows that a sharp increase in interest rates also strengthens medium term fiscal policy impact on GDP in Central and Eastern European economy.
First published online 14 November 2024
Keyword : fiscal policy, liquidity constraints, government spending, fiscal multipliers, access to loans, CEE economy, Poland
How to Cite
Krajewski, P., & Piłat, K. (2024). The impact of liquidity constraints on the effectiveness of fiscal policy: evidence from Poland. Technological and Economic Development of Economy, 1-16. https://doi.org/10.3846/tede.2024.21982
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Bernardini, M., Schryder, S. D., & Peersman, G. (2020). Heterogeneous government spending multipliers in the era surrounding the great recession. The Review of Economics and Statistics, 102(2), 304–322. https://doi.org/10.1162/rest_a_00830
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Brumberg, R., & Modigliani, F. (1954). Utility analysis and the consumption function: An interpretation of cross-section data. In K. K. Kurihara (Ed.), Post-Keynesian economics (pp. 388–436). NJ Rutgers University Press.
Caggiano, G., Castelnuovo, E., Colombo, V., & Nodari, G. (2015) Estimating fiscal multipliers: News from a non-linear world. The Economic Journal, 125(584), 746–776. https://doi.org/10.1111/ecoj.12263
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Cantore, C., & Freund, L. B. (2021). Workers, capitalists, and the government: Fiscal policy and income (re)distribution. Journal of Monetary Economics, 119, 58–74. https://doi.org/10.1016/j.jmoneco.2021.01.004
Canzoneri, M., Collard, F., Dellas, H., & Diba, B. (2016). Fiscal multipliers in recessions. Economic Journal, 126(590), 75–108. https://doi.org/10.1111/ecoj.12304
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Chung, H., Davig, T., & Leeper, E. M. (2007). Monetary and fiscal policy switching. Journal of Money, Credit and Banking, 39(4), 809–842. https://doi.org/10.1111/j.1538-4616.2007.00047.x
Coenen, G., & Straub, R. (2005). Does government spending crowd in private consumption? Theory and empirical evidence for the euro area. International Finance, 8(3), 435–470. https://doi.org/10.1111/j.1468-2362.2005.00166.x
Coenen, G., Erceg, C. J., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., de Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabandt, W., & in’t Veld, J. (2012a). Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics, 4(1), 22–68. https://doi.org/10.1257/mac.4.1.22
Coenen, G., Straub, R., & Trabandt, M. (2012b). Fiscal policy and the great recession in the euro area. American Economic Review, 102(3), 71–76. https://doi.org/10.1257/aer.102.3.71
Cogan, J. F., Cwik, T., Taylor, J. B., & Wieland, V. (2010). New Keynesian versus old Keynesian government spending multipliers. Journal of Economic Dynamics and Control, 34(3), 281–295. https://doi.org/10.1016/j.jedc.2010.01.010
Corsetti, G., Meier, A., & Müller, G. J. (2012). What determines government spending multipliers? Economic Policy, 27(72), 521–565. https://doi.org/10.1111/j.1468-0327.2012.00295.x
Davig, T., & Leeper, E. M. (2011). Monetary-fiscal policy interactions and fiscal stimulus. European Economic Review, 55(2), 211–227. https://doi.org/10.1016/j.euroecorev.2010.04.004
Deaton, A. (1992). Understanding consumption. Oxford University Press. https://doi.org/10.1093/0198288247.001.0001
Demyanyk, Y., Loutskina, E., & Murphy, D. (2019). Fiscal stimulus and consumer debt. The Review of Economics and Statistics, 101(4), 728–741. https://doi.org/10.1162/rest_a_00796
Dixit, A. K., & Stiglitz, J. E. (1977). Monopolistic competition and optimum product diversity. American Economic Review, 67(3), 297–308.
Eggertsson, G. B. (2011). What fiscal policy is effective at zero interest rates? NBER Macroeconomics Annual, 25, 59–112. https://doi.org/10.1086/657529
Eggertsson, G. B., & Krugman, P. (2012). Debt, deleveraging, and the liquidity trap: A fisher-Minsky-Koo approach. The Quarterly Journal of Economics, 127(3), 1469–1513. https://doi.org/10.1093/qje/qjs023
Erceg, C., & Lindé, J. (2014). Is there a fiscal free lunch in a liquidity trap? Journal of the European Economic Association, 12(1), 73–107. https://doi.org/10.1111/jeea.12059
Eurostat. (n.d.). https://ec.europa.eu/eurostat
Fernández–Villaverde, J. (2010). The econometrics of DSGE model. SERIEs Journal of Spanish Economic Association, 1(1–2), 3–49. https://doi.org/10.1007/s13209-009-0014-7
Fisher, J. D., Johnson, D. S., Smeeding, T. M., & Thompson, J. P. (2020). Estimating the marginal propensity to consume using the distributions of income, consumption, and wealth. Journal of Macroeconomics, 65, Article 103218. https://doi.org/10.1016/j.jmacro.2020.103218
Friedman, M. (1957). A theory of the consumption function. Princeton University Press. https://doi.org/10.1515/9780691188485
Furceri, D., & Mourougane, A. (2010). The effects of fiscal policy on output: A DSGE analysis (OECD Economics Department Working Paper No. 770). https://doi.org/10.1787/5kmfp4z3njg0-en
Galí, J., López-Salido, J. D., & Vallés, J. (2004). Rule-of-thumb consumers and the design of interest rate rules. Journal of Money, Credit & Banking, 36(4), 739–764. https://doi.org/10.1353/mcb.2004.0064
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