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Fiscal Multipliers and Financial Crises

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Abstract

What type of fiscal policy is most effective during a financial crisis? I study the macroeconomic effects of the US fiscal policy response to the Great Recession, accounting not only for standard tools such as government purchases and transfers but also for financial sector interventions such as bank recapitalizations and credit guarantees. A nonlinear quantitative model calibrated to the US allows me to study the state-dependent effects of different types of fiscal policies. I combine the model with data on the US fiscal policy response to find that the fall in aggregate consumption would have been 50% worse in the absence of that response with a cumulative loss of 9.16%. Transfers and bank recapitalizations yielded the largest fiscal multipliers at the height of the crisis, due to new transmission channels that arise from linkages between household and bank balance sheets.

Suggested Citation

  • Faria-e-Castro, Miguel, 2018. "Fiscal Multipliers and Financial Crises," Working Papers 2018-23, Federal Reserve Bank of St. Louis, revised 04 Jun 2019.
  • Handle: RePEc:fip:fedlwp:2018-023
    DOI: 10.20955/wp.2018.023
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    1. repec:nbr:nberch:13342 is not listed on IDEAS
    2. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Measuring the Output Responses to Fiscal Policy," American Economic Journal: Economic Policy, American Economic Association, vol. 4(2), pages 1-27, May.
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    Cited by:

    1. Pierre-Olivier Gourinchas & Thomas Philippon & Dimitri Vayanos, 2017. "The Analytics of the Greek Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 1-81.
    2. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2019. "Default, Bailouts and the Vertical Structure of Financial Intermediaries," Working Papers 2019_04, Durham University Business School.
    3. repec:fip:fedles:00118 is not listed on IDEAS
    4. repec:eee:moneco:v:101:y:2019:i:c:p:100-127 is not listed on IDEAS
    5. Lorenzo Bretscher & Alex Hsu & Andrea Tamoni, 2017. "Level and Volatility Shocks to Fiscal Policy: Term Structure Implications," 2017 Meeting Papers 258, Society for Economic Dynamics.
    6. Faria-e-Castro, Miguel, 2019. "A Quantitative Analysis of Countercyclical Capital Buffers," Working Papers 2019-8, Federal Reserve Bank of St. Louis, revised 01 Jun 2019.
    7. Gourinchas, Pierre-Olivier & Philippon, Thomas & Vayanos, Dimitri, 2016. "The analytics of the Greek crisis: celebratory centenary issue," LSE Research Online Documents on Economics 67368, London School of Economics and Political Science, LSE Library.
    8. Pedro Brinca & Hans Holter & Miguel Faria-e-Castro & Miguel Ferreira, 2019. "The Nonlinear Effects of Fiscal Policy," 2019 Meeting Papers 934, Society for Economic Dynamics.
    9. Paul, Pascal, 2017. "A Macroeconomic Model with Occasional Financial Crises," Working Paper Series 2017-22, Federal Reserve Bank of San Francisco.

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    Keywords

    fiscal multipliers; financial crisis; bailouts; nonlinear methods;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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