The Effectiveness of Fiscal Policy in case of Liquidity Constrains

The aim the article is to estimate the effects of government spending in case of liquidity constraints. The analysis is based on new Keynesian dynamic stochastic general equilibrium model, which takes into account both optimizing households and households with liquidity constraints. Optimising household make decisions on the basis of permanent income whereas households facing liquidity constraints make decisions on the basis of their current income. The parameters of the model were estimated for economy of the Czech Republic on the basis of Bayesian approach, which takes into account both empirical data and a priori assumptions concerning parameters distributions. The results of the study indicate that the share of households without access to the banking sector has significant impact on fiscal multipliers. The impulse-response functions show that the increase in the share of households without access to the banking sector translated into stronger impact of government spending on GDP in the Czech Republic. It means, that there is some trade-off between the effectiveness of fiscal policy as a tool of GDP stabilization within business cycle and households access to the credit market.