Fiscal Policies and Credit Regimes: A TVAR Approach

38 Pages Posted: 3 Feb 2013 Last revised: 26 Apr 2014

See all articles by Tommaso Ferraresi

Tommaso Ferraresi

Istituto Regionale Programmazione Economica Toscana (IRPET)

Andrea Roventini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM); Observatoire Fran├žais des Conjonctures Economiques (OFCE)

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Date Written: April 24, 2014

Abstract

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-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.

Keywords: fiscal policy, threshold vector autoregression (TVAR), non-linear models, impulse-response functions, fiscal multipliers, credit frictions, financial accelerator

JEL Classification: J32, E32, E44, E62

Suggested Citation

Ferraresi, Tommaso and Roventini, Andrea and Fagiolo, Giorgio, Fiscal Policies and Credit Regimes: A TVAR Approach (April 24, 2014). Available at SSRN: https://ssrn.com/abstract=2211105 or http://dx.doi.org/10.2139/ssrn.2211105

Tommaso Ferraresi

Istituto Regionale Programmazione Economica Toscana (IRPET) ( email )

Firenze, 50100
Italy

Andrea Roventini (Contact Author)

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

Observatoire Fran├žais des Conjonctures Economiques (OFCE)

69 Quai d'Orsay
Paris 75004
France

Giorgio Fagiolo

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta', 33-I-56127
Pisa
Italy

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