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Financial market imperfections, informality and government spending multipliers

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  • Kumar, Alok

Abstract

Developing countries are characterized by underdeveloped financial markets and a large share of informal sector in economic activity. Evidence suggests that countries with less developed financial sector have lower government spending multipliers. This paper quantifies government spending multipliers in India using an estimated new-Keynesian DSGE model with two types of entrepreneurs: formal and informal and imperfect financial market. In the model, informal entrepreneurs are financially-excluded and the banking sector is monopolistically competitive featuring collateral constraint and sticky interest rates. Results show that the government consumption multiplier is significantly less than one at all horizons. The government investment multiplier is also significantly less than one at shorter horizons, but becomes approximately one at longer horizons.

Suggested Citation

  • Kumar, Alok, 2023. "Financial market imperfections, informality and government spending multipliers," Journal of Development Economics, Elsevier, vol. 163(C).
    • Handle: RePEc:eee:deveco:v:163:y:2023:i:c:s0304387823000585
    DOI: 10.1016/j.jdeveco.2023.103103
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    More about this item

    Keywords

    Government investment; Government consumption; Financial market imperfections; Government spending multipliers; Informal sector; Financially-excluded entrepreneurs;
    All these keywords.

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • F11 - International Economics - - Trade - - - Neoclassical Models of Trade

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