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Fiscal Policy and Lending Relationships

Author

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  • Giovanni Melina

    (Department of Economics, Mathematics & Statistics, Birkbeck
    University of Surrey)

  • Stefania Villa

    (Department of Economics, Mathematics & Statistics, Birkbeck
    University of Foggia)

Abstract

This paper studies how fiscal policy affects credit market conditions. First, it conducts a FAVAR analysis showing that the credit spread responds negatively to an expansionary government spending shock, while consumption, investment, and lending increase. Second, it illustrates that these results are not mimicked by a DSGE model where the credit spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it demonstrates that introducing deep habits in private and government consumption makes the model able to replicate empirics. Sensitivity checks and extensions show that core results hold for a number of model calibrations and specifications. The presence of banks exploiting lending relationships generates a financial accelerator effect in the transmission of fiscal shocks.

Suggested Citation

  • Giovanni Melina & Stefania Villa, 2011. "Fiscal Policy and Lending Relationships," Birkbeck Working Papers in Economics and Finance 1103, Birkbeck, Department of Economics, Mathematics & Statistics.
  • Handle: RePEc:bbk:bbkefp:1103
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    Cited by:

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    2. Shuonan Zhang, 2024. "State‐owned enterprises and entrusted lending: Economic growth and business cycles in China," Economic Inquiry, Western Economic Association International, vol. 62(1), pages 197-222, January.
    3. Anthony J. Makin, 2015. "Expansionary Versus Contractionary Government Spending," Contemporary Economic Policy, Western Economic Association International, vol. 33(1), pages 56-65, January.
    4. Serena Merrino, 2021. "Statedependent fiscal multipliers and financial dynamics An impulse response analysis by local projections for South Africa," Working Papers 11015, South African Reserve Bank.
    5. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    6. Giovanni Melina & Stefania Villa, 2018. "Leaning Against Windy Bank Lending," Economic Inquiry, Western Economic Association International, vol. 56(1), pages 460-482, January.
    7. Giovanni Melina & Stefania Villa, 2023. "Drivers of large recessions and monetary policy responses," Temi di discussione (Economic working papers) 1425, Bank of Italy, Economic Research and International Relations Area.
    8. Melina, Giovanni & Villa, Stefania, 2023. "Drivers of large recessions and monetary policy responses," Journal of International Money and Finance, Elsevier, vol. 137(C).
    9. Madiha MUNIR & Saira TUFAIL & Ather Maqsood AHMED, 2023. "Financial Segmentation and Transmission of Monetary and Real Shocks : Implications for Consumption, Labour, and Credit Distribution," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(3), pages 101-119, October.
    10. Tommaso Ferraresi & Andrea Roventini & Giorgio Fagiolo, 2015. "Fiscal Policies and Credit Regimes: A TVAR Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 30(7), pages 1047-1072, November.
    11. Hashmat Khan & Abeer Reza, 2017. "House Prices and Government Spending Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(6), pages 1247-1271, September.
    12. Ravn, Søren Hove, 2016. "Endogenous credit standards and aggregate fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 89-111.
    13. Ji, Kan & Qian, Zongxin, 2015. "Does tax policy affect credit spreads? Evidence from the US and UK," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 318-329.
    14. Di Pace, Federico & Villa, Stefania, 2016. "Factor complementarity and labour market dynamics," European Economic Review, Elsevier, vol. 82(C), pages 70-112.
    15. Sebastian Gechert & Ansgar Rannenberg, 2014. "Are Fiscal Multipliers Regime-Dependent? A Meta Regression Analysis," IMK Working Paper 139-2014, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
    16. Winter, Christoph & Kraus, Beatrice, 2016. "Do Tax Changes Affect Credit Markets and Financial Frictions? Evidence from Credit Spreads," VfS Annual Conference 2016 (Augsburg): Demographic Change 145636, Verein für Socialpolitik / German Economic Association.

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    JEL classification:

    • 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

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