Open Access Letter

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

by Zhiming Ao a,* ,  Ziyue Chen b  and  He Nie c
a
School of Economics, Jinan University, Guangzhou, China
b
Department of Manufacturing and Civil Engineering, Norwegian University of Science and Technology, Norway
c
Department of Economics, National University of Singapore, Singapore
*
Author to whom correspondence should be addressed.
FEL  2022, 3; 1(1), 3; https://doi.org/10.58567/fel01010003
Received: 16 November 2022 / Accepted: 16 December 2022 / Published Online: 27 December 2022
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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.

Keywords: Time-to-build; Financial frictions; Public spending;
Copyright: © 2022 by Ao, Chen and Nie. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY) (Creative Commons Attribution 4.0 International License). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.
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ACS Style
Ao, Z.; Chen, Z.; Nie, H. Time to build, financial frictions, and the effectiveness of fiscal stimulus. Financial Economics Letters, 2022, 1, 3. https://doi.org/10.58567/fel01010003
AMA Style
Ao Z, Chen Z, Nie H. Time to build, financial frictions, and the effectiveness of fiscal stimulus. Financial Economics Letters; 2022, 1(1):3. https://doi.org/10.58567/fel01010003
Chicago/Turabian Style
Ao, Zhiming; Chen, Ziyue; Nie, He 2022. "Time to build, financial frictions, and the effectiveness of fiscal stimulus" Financial Economics Letters 1, no.1:3. https://doi.org/10.58567/fel01010003
APA style
Ao, Z., Chen, Z., & Nie, H. (2022). Time to build, financial frictions, and the effectiveness of fiscal stimulus. Financial Economics Letters, 1(1), 3. https://doi.org/10.58567/fel01010003

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