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Fiscal Policies and Credit Regimes: A TVAR Approach

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  • Tommaso Ferraresi

    ()
    (Istituto Regionale di Programmazione Economica della Toscana, Firenze, University of Pisa, Italy)

  • Andrea Roventini

    ()
    (Department of Economics (University of Verona))

  • Giorgio Fagiolo

    ()
    (Sant'Anna School of Advanced Studies, Pisa)

Abstract

In the present work we investigate how the state of credit markets non-linearly affects the impact of fiscal policies. We estimate a Threshold Vector Autoregression (TVAR) model on U.S quarterly data for the period 1984-2010. We employ the spread between BAA-rated corporate bond yield and 10-year treasury constant maturity rate as a proxy for credit conditions. We find that the response of output to fiscal policy shocks are stronger and more persistent when the economy is in the ``tight'' credit regime. The fiscal multipliers are abundantly and persistently higher than one when firms face increasing financing costs, whereas they are feebler and often lower than one in the ``normal'' credit regime. On the normative side, our results suggest policy makers to carefully plan fiscal policy measures according to the state of credit markets.

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Bibliographic Info

Paper provided by University of Verona, Department of Economics in its series Working Papers with number 03/2013.

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Length: 35
Date of creation: Feb 2013
Date of revision:
Handle: RePEc:ver:wpaper:03/2013

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Keywords: fiscal policy; threshold vector autoregression (TVAR); non-linear models; impulse-response functions; fiscal multipliers; credit frictions; financial accelerator;

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Cited by:
  1. Gustav A. Horn & Sebastian Gechert & Katja Rietzler & Kai D. Schmid, 2014. "Streitfall Fiskalpolitik," IMK Report 92-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Sebastian Gechert & Rafael Mentges, 2013. "What Drives Fiscal Multipliers? The Role of Private Wealth and Debt," IMK Working Paper 124-2013, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.

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