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Fiscal Policies and Credit Regimes: A TVAR Approach

  • Tommaso Ferraresi

    ()

    (Istituto Regionale di Programmazione Economica della Toscana, Firenze, University of Pisa, Italy)

  • Andrea Roventini

    ()

    (Department of Economics (University of Verona))

  • Giorgio Fagiolo

    ()

    (Sant'Anna School of Advanced Studies, Pisa)

In the present work we investigate how the state of credit markets non-linearly affects 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-year 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 University of Verona, Department of Economics in its series Working Papers with number 03/2013.

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Length: 35
Date of creation: Feb 2013
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Handle: RePEc:ver:wpaper:03/2013
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