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Do Contractionary Fiscal Policy Shocks Transmitted via GDP Growth Dampen Credit Growth?

In: Achieving Price, Financial and Macro-Economic Stability in South Africa

Author

Listed:
  • Nombulelo Gumata

    (South African Reserve Bank)

  • Eliphas Ndou

    (South African Reserve Bank)

Abstract

Does the GDP growth channel amplify the effects of contractionary fiscal policy on credit growth? Evidence shows that a positive tax shock has an adverse effect on credit growth. The decline in credit growth is more than that of GDP growth due to a positive tax shock. Furthermore, credit growth responses to spending cut shocks are larger and spending cut shocks induce more fluctuations in credit growth. Fiscal spending cut shocks in the long run explain about 60 per cent of fluctuations in credit growth, which exceeds the 14 per cent due to positive tax shocks. Credit growth declines more especially due to positive shocks to taxes on goods and services and personal income tax compared to an increase in company tax. This is because GDP growth leads to a larger credit growth contraction due to positive shocks to tax on goods and services and personal income tax compared to company tax shocks. GDP growth plays an important role in the transmission of spending cuts and positive tax shocks in credit dynamics. GDP growth amplifies the reaction of credit growth to contractionary fiscal policy shocks. Hence, the GDP growth channel is a potent channel through which the contractionary fiscal shocks are transmitted to credit growth.

Suggested Citation

  • Nombulelo Gumata & Eliphas Ndou, 2021. "Do Contractionary Fiscal Policy Shocks Transmitted via GDP Growth Dampen Credit Growth?," Springer Books, in: Achieving Price, Financial and Macro-Economic Stability in South Africa, chapter 0, pages 87-96, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-66340-7_6
    DOI: 10.1007/978-3-030-66340-7_6
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