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Fiscal Multipliers and Financial Crises

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  • Miguel Faria-e-Castro

    (New York University)

Abstract

What is the impact of an extra dollar of government spending during a financial crisis? How important was U.S. fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data to assess the impact of the fiscal policy response during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would have been 50% worse in the absence of fiscal interventions; and (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers.

Suggested Citation

  • Miguel Faria-e-Castro, 2017. "Fiscal Multipliers and Financial Crises," 2017 Meeting Papers 300, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:300
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    File URL: https://economicdynamics.org/meetpapers/2017/paper_300.pdf
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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. 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.
    3. 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.
    4. 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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