Using a dynamic stochastic general equilibrium (DSGE) model that accounts for credit constraints, we study the effects of fiscal stimulus on the macroeconomy. We show that the presence of credit constraints results in larger fiscal multipliers than indicated by the standard DSGE models. If...

We investigate optimal monetary policy design using a New Keynesian model that accommodates liquidity frictions. In this model, unlike the standard New Keynesian model, the central bank faces a trade-off between inflation and output stabilisation. Optimal policy requires a temporary deviation...