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Effects of Fiscal Policy on Credit Markets

Author

Listed:
  • Alan J. Auerbach
  • Yuriy Gorodnichenko
  • Daniel Murphy

Abstract

Credit markets typically freeze in recessions: access to credit declines and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in U.S. federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

Suggested Citation

  • Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Effects of Fiscal Policy on Credit Markets," NBER Working Papers 26655, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26655
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy

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