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Fiscal consolidations and the cost of credit

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  • Ağca, Şenay
  • Igan, Deniz

Abstract

Using loan-level data covering 15 advanced economies over 1990–2014, we show that the cost of credit increases with fiscal consolidations. This increase is observed with both tax hikes and spending cuts, and is smaller when the consolidation is large. The cost of credit goes up with tax hikes that apply to a particular sector, but not with spending cuts that are directed at a certain sector. Firms that face higher costs tend to be small, highly leveraged, domestic, government dependent, and financially constrained. Hence, there may be costs associated with fiscal consolidations—beyond the aggregate-demand channel—borne primarily by firms operating in sectors directly affected by the consolidation measures and by those that have limited access to international markets and alternative financing sources.

Suggested Citation

  • Ağca, Şenay & Igan, Deniz, 2019. "Fiscal consolidations and the cost of credit," Journal of International Economics, Elsevier, vol. 120(C), pages 84-108.
  • Handle: RePEc:eee:inecon:v:120:y:2019:i:c:p:84-108
    DOI: 10.1016/j.jinteco.2019.05.004
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    More about this item

    Keywords

    Fiscal policy; Sovereign debt; Cost of credit; Corporate loans;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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