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Fiscal Policy and Credit Supply in a Crisis

Author

Listed:
  • Diana Bonfim
  • Miguel A. Ferreira
  • Francisco Queiró
  • Sujiao (Emma) Zhao

Abstract

We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3 percent of GDP. We find that this cut saddled banks with nonperforming loans from government contractors, which led to a persistent reduction in credit supply to other firms. We estimate a bank-level elasticity of credit supply with respect to procurement demand of 2.5. In a general equilibrium model, our findings point to large effects of fiscal policy on credit supply and output in a crisis.

Suggested Citation

  • Diana Bonfim & Miguel A. Ferreira & Francisco Queiró & Sujiao (Emma) Zhao, 2025. "Fiscal Policy and Credit Supply in a Crisis," American Economic Review, American Economic Association, vol. 115(6), pages 1896-1935, June.
    • Handle: RePEc:aea:aecrev:v:115:y:2025:i:6:p:1896-1935
    DOI: 10.1257/aer.20221499
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    More about this item

    JEL classification:

    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement

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