On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?
AbstractRecently, some notable contributions suggest, that discretionary fiscal policy can be an effective and self- financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears. Loan loss forecasts over the period 2012-2014 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-á-vis its main financial institutions, may have significant implications for the fiscal multiplier.
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Bibliographic InfoPaper provided by Central Bank of Ireland in its series Research Technical Papers with number 01/RT/13.
Date of creation: Mar 2013
Date of revision:
House prices; unemployment; mortgage arrears; fiscal multiplier;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Production Analysis, and Firm Location - - - General
- C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-20 (All new papers)
- NEP-BAN-2013-04-20 (Banking)
- NEP-URE-2013-04-20 (Urban & Real Estate Economics)
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