Fiscal Policy, Banks and the Financial Crisis

National Bank of Belgium Working Paper No. 234

45 Pages Posted: 14 Oct 2012

See all articles by Robert Kollmann

Robert Kollmann

ECARES, Université Libre de Bruxelles; University of Paris XII - Department of Economics; Centre for Economic Policy Research (CEPR)

Marco Ratto

European Commission - Joint Research Center

Werner Roeger

European Commission, DGECFIN

Jan in 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN)

Date Written: September 17, 2012

Abstract

This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent financial crisis, using an estimated New Keynesian model with a bank. A key dimension of policy in the crisis was massive government support for banks — that dimension has so far received little attention in the macro literature. We use the estimated model to analyze the effects of bank asset losses, of government support for banks, and other fiscal stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing effect on EA output, consumption and investment. Increased government purchases helped to stabilize output, but crowded out consumption. Higher transfers to households had a positive impact on private consumption, but a negligible effect on output and investment. Banking shocks and increased government spending explain half of the rise in the public debt/GDP ratio since the onset of the crisis.

Keywords: financial crisis, bank rescue measures, fiscal policy

JEL Classification: E62, E32, G21, H63, F41

Suggested Citation

Kollmann, Robert and Ratto, Marco and Roeger, Werner and in 't Veld, Jan, Fiscal Policy, Banks and the Financial Crisis (September 17, 2012). National Bank of Belgium Working Paper No. 234, Available at SSRN: https://ssrn.com/abstract=2160851 or http://dx.doi.org/10.2139/ssrn.2160851

Robert Kollmann (Contact Author)

ECARES, Université Libre de Bruxelles ( email )

Ave. Franklin D Roosevelt, 50 - C.P. 114
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Belgium

University of Paris XII - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR)

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Marco Ratto

European Commission - Joint Research Center ( email )

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Werner Roeger

European Commission, DGECFIN ( email )

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Belgium

Jan In 't Veld

European Union - Directorate General for Economic and Financial Affairs (DG ECFIN) ( email )

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