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Fiscal Policy, Banks and the Financial Crisis

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  • In''t Veld, Jan
  • Kollmann, Robert
  • Ratto, Marco
  • Roeger, Werner

Abstract

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks—that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9175.

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Date of creation: Oct 2012
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Handle: RePEc:cpr:ceprdp:9175

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Keywords: bank rescue measures; financial crisis; fiscal policy;

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Citations

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Cited by:
  1. in 't Veld, Jan & Kollmann, Robert & Pataracchia, Beatrice & Ratto, Marco & Roeger, Werner, 2014. "International capital flows and the boom-bust cycle in Spain," Globalization and Monetary Policy Institute Working Paper 181, Federal Reserve Bank of Dallas.
  2. Robert Kollmann & Marco Ratto & Werner Roeger & Jan in’t Veld & Lukas Vogel, 2014. "What drives the German current account? And how does it affect other EU member states?," European Economy - Economic Papers 516, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  3. Balteanu, Irina & Erce, Aitor, 2014. "Bank Crises and Sovereign Defaults in Emerging Markets: Exploring the Links," Globalization and Monetary Policy Institute Working Paper 184, Federal Reserve Bank of Dallas.
  4. Javier Bianchi, 2012. "Efficient bailouts?," Globalization and Monetary Policy Institute Working Paper 133, Federal Reserve Bank of Dallas.
  5. Robert Kollmann, 2013. "Global Banks, Financial Shocks, and International Business Cycles: Evidence from an Estimated Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(s2), pages 159-195, December.
  6. Adnan Efendić & Naida Trkic-Izmirlija, 2013. "Effects of the global economic crisis and public spending on income distribution in Bosnia and Herzegovina," wiiw Balkan Observatory Working Papers 108, The Vienna Institute for International Economic Studies, wiiw.
  7. Corsetti, Giancarlo & Kuester, Keith & Meier, André & Müller, Gernot, 2013. "Sovereign risk and belief-driven fluctuations in the euro area," CEPR Discussion Papers 9723, C.E.P.R. Discussion Papers.
  8. Robert Kollmann, 2013. "Estimation of non-linear DSGE models made easy: taking second-order model approximations to the data (with an application to a DSGE model with a banking sector)," 2013 Meeting Papers 1255, Society for Economic Dynamics.

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