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Fiscal policy, banks and the financial crisis

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Author Info

  • Robert Kollmann

    (ECARES, Université Libre de Bruxelles
    Université Paris-Est
    CEPR)

  • Marco Ratto

    (Joint Research Centre, European Commission)

  • Werner Roeger

    (DG-ECFIN, European Commission)

  • Jan in't Veld

    (DG-ECFIN, European Commission)

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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Bibliographic Info

Paper provided by National Bank of Belgium in its series Working Paper Research with number 234.

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Length: 45 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:nbb:reswpp:201210-234

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

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Citations

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Cited by:
  1. 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.
  2. Kollmann, Robert & Ratto, Marco & Roeger, Werner & in 't Veld, Jan & Vogel, Lukas, 2014. "What drives the German current account? and how does it affect other EU member states?," Globalization and Monetary Policy Institute Working Paper 176, Federal Reserve Bank of Dallas.
  3. 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.
  4. Jan in'tVeld & Robert Kollmann & Beatrice Pataracchia & Marco Ratto & Werner Roeger, 2014. "International Capital Flows and the Boom-Bust Cycle in Spain," Working Papers ECARES ECARES 2014-26, ULB -- Universite Libre de Bruxelles.
  5. Robert Kollmann, 2012. "Global banks, financial shocks and international business cycles: evidence from an estimated model," Globalization and Monetary Policy Institute Working Paper 120, Federal Reserve Bank of Dallas.
  6. 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.
  7. 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.
  8. Javier Bianchi, 2012. "Efficient bailouts?," Globalization and Monetary Policy Institute Working Paper 133, Federal Reserve Bank of Dallas.

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