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Government Size and Business Cycle Volatility; How Important Are Credit Constraints?

  • Markus Leibrecht

    ()

    (Leuphana University Lueneburg, Department of Economics, Germany)

  • Johann Scharler

    ()

    (University of Innsbruck, Department of Economics, Austria)

In this paper we analyze how the availability of credit in uences the relationship between government size as a proxy for scal stabilization policy and the amplitude of business cycle uctuations in a sample of advanced OECD countries. Interpreting relatively low loan-tovalue ratios as an indication for tight credit constraints, we nd that government size exerts a stabilizing e ect on output and consumption growth uctuations only when credit constraints are relatively tight. Our results are robust with respect to di erent measures of government size and provide support for the hypothesis that credit market frictions play a crucial role in the transmission of scal policy.

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Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 237.

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Length: 31 pages
Date of creation: Apr 2012
Date of revision:
Handle: RePEc:lue:wpaper:237
Contact details of provider: Web page: http://leuphana.de/institute/ivwl.html

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