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Fiscal Policy and Lending Relationships

  • Giovanni Melina
  • Stefania Villa

This paper studies how fiscal policy affects loan market conditions in the US. 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 Dynamic Stochastic General Equilibrium 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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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/141.

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Length: 48
Date of creation: 05 Jun 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/141
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