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Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measure

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  • Robert Kollmann
  • Werner Roeger
  • Jan in'tVeld

Abstract

A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.

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Bibliographic Info

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers ECARES with number ECARES 2012-008.

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Length: 13 p.
Date of creation: Feb 2012
Date of revision:
Publication status: Published by:
Handle: RePEc:eca:wpaper:2013/109907

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Keywords: state support for banks; financial crisis; financial stimulus; real activity;

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  1. Kollmann, Robert & Enders, Zeno & Müller, Gernot J., 2011. "Global banking and international business cycles," European Economic Review, Elsevier, vol. 55(3), pages 407-426, April.
  2. 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.
  3. In't Veld, Jan & Raciborski, Rafal & Ratto, Marco & Roeger, Werner, 2011. "The recent boom-bust cycle: The relative contribution of capital flows, credit supply and asset bubbles," European Economic Review, Elsevier, vol. 55(3), pages 386-406, April.
  4. Damiano Sandri & Fabian Valencia, 2012. "Balance-Sheet Shocks and Recapitalizations," IMF Working Papers 12/68, International Monetary Fund.
  5. Fabian Valencia & Luc Laeven, 2011. "The Real Effects of Financial Sector Interventions During Crises," IMF Working Papers 11/45, International Monetary Fund.
  6. Todd B. Walker & Nora Traum & Eric M. Leeper, 2011. "The Fiscal Multiplier Morass: A Bayesian Perspective," 2011 Meeting Papers 583, Society for Economic Dynamics.
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Cited by:
  1. Robert Kollmann & Marco Ratto & Werner Roeger & Jan in'tVeld, 2012. "Fiscal Policy, Banks and the Financial Crisis," Working Papers ECARES ECARES 2012-034, ULB -- Universite Libre de Bruxelles.
  2. 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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