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Fiscal policy and lending relationships

  • Giovanni MELINA
  • Stefania VILLA

This paper studies how fiscal policy affects loan market conditions. First, it conducts a Structural Vector-Autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a Real Business Cycle model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock.

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File URL: https://lirias.kuleuven.be/bitstream/123456789/348272/1/DPS1206.pdf
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Paper provided by KU Leuven, Faculty of Economics and Business, Department of Economics in its series Working Papers Department of Economics with number ces12.06.

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Date of creation: May 2012
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Handle: RePEc:ete:ceswps:ces12.06
Contact details of provider: Web page: http://feb.kuleuven.be/Economics/

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