IDEAS home Printed from https://ideas.repec.org/p/gro/rugfeb/2023006-eef.html
   My bibliography  Save this paper

Financial Fragility and the Fiscal Multiplier

Author

Listed:
  • van der Kwaak, Christiaan
  • van Wijnbergen, Sweder

    (University of Groningen)

Abstract

We show that undercapitalized banks with large holdings of government bonds subject to sovereign default risk lead to a new crowding-out channel: deficit-financed fiscal stimuli lead to higher bond yields, triggering capital losses for the banks. Banks then cut back loans, giving rise to potentially negative fiscal multipliers. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find strong support for these results. The DSGE results further show strong nonlinear effects: the cumulative multiplier decreases substantially with the size of the stimulus, as well as with the amount of time between the announcement and implementation of the stimulus.

Suggested Citation

  • van der Kwaak, Christiaan & van Wijnbergen, Sweder, 2023. "Financial Fragility and the Fiscal Multiplier," Research Report 2023006-EEF, University of Groningen, FEB Research Institute (FEBRI).
    • Handle: RePEc:gro:rugfeb:2023006-eef
    as

    Download full text from publisher

    File URL: https://hdl.handle.net/11370/3bdeb02c-f2f4-40f1-8327-38c9eb508f3b
    Download Restriction: no
    ---><---

    Other versions of this item:

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Strobel, Felix, 2018. "The government spending multiplier, fiscal stress, and the zero lower bound," VfS Annual Conference 2018 (Freiburg, Breisgau): Digital Economy 181531, Verein für Socialpolitik / German Economic Association.
    2. Yu, Sherry, 2017. "Sovereign and bank Interdependencies—Evidence from the CDS market," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 68-84.

    More about this item

    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
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gro:rugfeb:2023006-eef. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Hanneke Tamling (email available below). General contact details of provider: https://edirc.repec.org/data/ferugnl.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.