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Fiscal Policies and Credit Regimes: A TVAR Approach

Listed author(s):
  • Tommaso Ferraresi
  • Andrea Roventini
  • Giorgio Fagiolo

In the present work we investigate how the state of credit markets non-linearly affect the impact of fiscal policies. We estimate a Threshold Vector Autoregression (TVAR) model on U.S quarterly data for the period 1984-2010. We employ the spread between BAA-rated corporate bond yield and 10-Years treasury constant maturity rate as a proxy for credit conditions. We find that the response of output to fiscal policy shocks are stronger and more persistent when the economy is in the "tight" credit regime. The fiscal multipliers are abundantly and persistently higher than one when firms face increasing financing costs, whereas they are feebler and often lower than one in the "normal" credit regime. On the normative side, our results suggest policy makers to carefully plan fiscal policy measures according to the state of credit markets.

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Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2013/03.

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Date of creation: 04 Feb 2013
Handle: RePEc:ssa:lemwps:2013/03
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