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Time to build, financial frictions, and the effectiveness of fiscal stimulus

Author

Listed:
  • Zhiming Ao

    (School of Economics, Jinan University, Guangzhou, China)

  • Ziyue Chen

    (Department of Manufacturing and Civil Engineering, Norwegian University of Science and Technology, Norway)

  • He Nie

    (Department of Economics, National University of Singapore, Singapore)

Abstract

By introducing time to build, which creates a time-lag between government investment and the accumulation of productive capital, into an analysis of fiscal stimulus to the economy with financial frictions, we find that the effectiveness of fiscal policy is dampened. While the weakening effects of time to build become significantly weaker alongside with a higher fraction of government bonds allocated to leverage-constrained banks, which can be explained by a high correlation between time to build and financial frictions in both worsening balance sheet conditions of banks. Furthermore, the stimulus effects of public investment become stronger associated with shorter time-to-build period.

Suggested Citation

  • Zhiming Ao & Ziyue Chen & He Nie, 2022. "Time to build, financial frictions, and the effectiveness of fiscal stimulus," Financial Economics Letters, Anser Press, vol. 1(1), pages 21-28, December.
    • Handle: RePEc:bba:j00007:v:1:y:2022:i:1:p:21-28:d:125
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    References listed on IDEAS

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