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On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?

Author

Listed:
  • Robert Kelly

    (Central Bank of Ireland)

  • Kieran McQuinn

    (Economic and Social Research institute (ESRI))

Abstract

Recently, some notable contributions suggest that discretionary fiscal policy can be an effective and self-financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment, and mortgage arrears. Loan loss forecasts over the period 2012–14 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions, thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-´a-vis its main financial institutions may have significant implications for the net cost of a fiscal stimulus.

Suggested Citation

  • Robert Kelly & Kieran McQuinn, 2014. "On the Hook for Impaired Bank Lending: Do Sovereign-Bank Interlinkages Affect the Net Cost of a Fiscal Stimulus?," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 95-128, September.
  • Handle: RePEc:ijc:ijcjou:y:2014:q:3:a:3
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    References listed on IDEAS

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    1. David M. Williams, 2009. "House prices and financial liberalisation in Australia," Economics Series Working Papers 432, University of Oxford, Department of Economics.
    2. Kelly, Robert & O’Malley, Terence, 2016. "The good, the bad and the impaired: A credit risk model of the Irish mortgage market," Journal of Financial Stability, Elsevier, vol. 22(C), pages 1-9.
    3. Conefrey, Thomas & Fitz Gerald, John D., 2011. "The macro-economic impact of changing the rate of corporation tax," Economic Modelling, Elsevier, vol. 28(3), pages 991-999, May.
    4. Francesco Giavazzi & Marco Pagano, 1990. "Can Severe Fiscal Contractions Be Expansionary? Tales of Two Small European Countries," NBER Chapters,in: NBER Macroeconomics Annual 1990, Volume 5, pages 75-122 National Bureau of Economic Research, Inc.
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    7. Kennedy, Gerard & McQuinn, Kieran, 2012. "Why are Irish house prices still falling?," Economic Letters 05/EL/12, Central Bank of Ireland.
    8. Robert Kelly & Kieran Mcquinn & Rebecca Stuart, 2011. "Exploring the Steady-State Relationship Between Credit and GDP for a Small Open Economy–The Case Of Ireland," The Economic and Social Review, Economic and Social Studies, vol. 42(4), pages 455-477.
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    12. Congressional Budget Office, 2013. "Modifying Mortgages Involving Fannie Mae and Freddie Mac: Options for Principal Forgiveness," Reports 44115, Congressional Budget Office.
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    Citations

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    Cited by:

    1. Cronin, David & McQuinn, Kieran, 2016. "Credit availability, macroprudential regulations and the house price-to-rent ratio," Journal of Policy Modeling, Elsevier, vol. 38(5), pages 971-984.
    2. Duffy, David & Mc Inerney, Niall & McQuinn, Kieran, 2015. "Macroprudential Policy in a Recovering Market: Too Much too Soon?," Papers WP500, Economic and Social Research Institute (ESRI).
    3. Cronin, David & McQuinn, Kieran, 2014. "Irish Fiscal Policy in Good Times and in Bad: Its Impact During Different Stages of the Economic Cycle," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).
    4. repec:esr:qecsas:2017:winter:mcquinn is not listed on IDEAS
    5. McQuinn, Kieran & Addison-Smyth, Diarmaid, 2015. "Assessing the Sustainable Nature of Housing-Related Taxation Receipts: The Case of Ireland," Papers WP503, Economic and Social Research Institute (ESRI).
    6. Niall McInerney, 2016. "A Structural Model of Macroprudential Policy: the Case of Ireland," EcoMod2016 9643, EcoMod.
    7. McQuinn, Kieran, 2017. "The changing relationship between affordability and house prices: a cross-country examination," Papers WP560, Economic and Social Research Institute (ESRI).
    8. Bergin, Adele & Conroy, Niall & Garcia Rodriguez, Abian & Holland, Dawn & McInerney, Niall & Morgenroth, Edgar & Smith, Donal, 2017. "COSMO: A new COre Structural MOdel for Ireland," Papers WP553, Economic and Social Research Institute (ESRI).
    9. McQuinn, Kieran, 2014. "Bubble, Bubble Toil and Trouble? An Assessment of the Current State of the Irish Housing Market," Quarterly Economic Commentary: Special Articles, Economic and Social Research Institute (ESRI).

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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