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.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
