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Effects of Fiscal Policy on Credit Markets

Author

Listed:
  • Alan J. Auerbach
  • Yuriy Gorodnichenko
  • Daniel Murphy

Abstract

Credit markets typically freeze in recessions: access to credit declines, and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in US federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

Suggested Citation

  • Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Effects of Fiscal Policy on Credit Markets," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 119-124, May.
    • Handle: RePEc:aea:apandp:v:110:y:2020:p:119-24
    DOI: 10.1257/pandp.20201074
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    References listed on IDEAS

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    1. Daniel Murphy, 2015. "How Can Government Spending Stimulate Consumption?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 551-574, July.
    2. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle.
    3. Ozgur Emre Ergungor, 2010. "Bank Branch Presence and Access to Credit in Low‐ to Moderate‐Income Neighborhoods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1321-1349, October.
    4. Jorge Miranda-Pinto & Daniel Murphy & Kieran James Walsh & Eric R. Young, 2019. "Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus: Theory and Cross-Country Evidence," Discussion Papers Series 609, School of Economics, University of Queensland, Australia.
    5. Loutskina, Elena, 2011. "The role of securitization in bank liquidity and funding management," Journal of Financial Economics, Elsevier, vol. 100(3), pages 663-684, June.
    6. Yuriy Gorodnichenko & Walker Ray, 2017. "The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions," NBER Working Papers 24122, National Bureau of Economic Research, Inc.
    7. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
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    Cited by:

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    3. Gherghina Rodica & Câmpeanu Emilia-Mioara & Georgescu Georgiana-Camelia & Grecu Robert-Adrian, 2025. "Determinants of Credit Growth in Selected Central and Eastern European Countries," Proceedings of the International Conference on Business Excellence, Sciendo, vol. 19(1), pages 2911-2919.
    4. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    5. Frangiamore, Francesco & Matarrese, Marco Maria, 2025. "Government spending multipliers and financial fragility in Italy," Economic Modelling, Elsevier, vol. 145(C).
    6. Rüth, Sebastian K. & Simon, Camilla, 2020. "How Do Income and the Debt Position of Households Propagate Public into Private Spending?," Working Papers 0676, University of Heidelberg, Department of Economics.
    7. Gabriel, Ricardo Duque, 2024. "The Credit Channel of Public Procurement," Journal of Monetary Economics, Elsevier, vol. 147(S).
    8. Larsen, Rasmus Bisgaard & Ravn, Søren Hove & Santoro, Emiliano, 2025. "House prices, endogenous productivity, and the effects of government spending shocks," European Economic Review, Elsevier, vol. 172(C).
    9. Rüth, Sebastian K. & Simon, Camilla, 2022. "How do income and the debt position of households propagate fiscal stimulus into consumption?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
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    12. María Pía Olivero & Mikheil Dvalishvili, 2023. "What do fiscal stimulus packages mean for household debt?," Contemporary Economic Policy, Western Economic Association International, vol. 41(2), pages 282-299, April.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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