On Asymmetric Business Cycles and the Effectiveness of Counter-Cyclical Fiscal Policies

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