Public versus Private Provision of Liquidity: Is There a Trade-Off?

Christoph Winter and Sigrid Röhrs ()

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: Many researchers have recommended to increase public debt in the aftermath of the fi nancial crisis in order to relax borrowing constraints for private households. This advice is based on the common assumption that borrowing conditions of private agents are exogenous to public policy. We study the impact of government debt on the provision of private credit in an economy in which borrowing limits arise because of limited contract enforceability and are thus determined as equilibrium outcomes. As such, they also depend on public policy, in particular on the amount of public debt. Using an incomplete markets economy in which households are subject to uninsurable earnings shocks, we show that an increase in government debt crowds out the supply of private credit. We also fi nd that government debt has signi ficantly different implications for aggregate welfare and economic activity in general if borrowing constraints are endogenous.

JEL-codes: E20 E44 E60 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-dge and nep-mac
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Related works:
Journal Article: Public versus private provision of liquidity: Is there a trade-off? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100419

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