Fiscal Policy and Lending Relationships

Abstract:     
This paper studies how fiscal policy affects loan market conditions. First, it conducts a Structural Vector-Autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a Real Business Cycle model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock.

Number of Pages in PDF File: 24

Keywords: Fiscal policy, deep habits, bank spread, lending relationships

JEL Classification: E44, E62

working papers series