I study fiscal and monetary policies in a liquidity constrained environment using a New Keynesian dynamic stochastic general equilibrium model in which households face both a borrowing constraint and a resaleability constraint on their assets. This dissertation is composed of three papers. The first one examines the fiscal multiplier by assuming a closed economy. The multiplier implied by the model is large enough to suggest that fiscal policy is highly effective in a liquidity constrained environment. Government spending stimulates output by increasing aggregate demand and improving liquidity in the private sector. The second paper extends the model into a small-open-economy framework and studies the fiscal multiplier in a liquidity-constrained open economy. The size of the multiplier in this case depends heavily on the degree of international capital mobility. The multiplier is significantly larger if the small open economy has only limited access to foreign capital markets, suggesting that the liquidity improvement due to a fiscal expansion induces more economic growth at home if international capital markets are imperfect. The third paper investigates optimal monetary policy using the model in a closed-economy setting. Unlike in a standard model, the central bank in this liquidity constrained model faces a trade-off between inflation and output stabilisation. Optimal monetary policy requires a temporary deviation from price stability in response to a liquidity shock. The results show that quantitative easing improves the policy trade-off by relaxing liquidity constraints.