On asymmetric business cycles and the effectiveness of counter-cyclical fiscal policies

An investment model with informational frictions and uncertainty is developed to capture the asymmetric dynamics of business cycles. When hit by a negative shock, the economy responds differently, in both size and recovery length, than when hit by a positive shock. In the model, the role for fiscal policy in smoothing the effects of business cycles fluctuations depends on initial conditions at the time of the shock. Based on the degree of fiscal fragility of the government, expansionary fiscal policy may be expansionary or contractionary in terms of output.