Financial Fragility and the Fiscal Multiplier

Tinbergen Institute Discussion Paper 14-004/VI/DSF70

99 Pages Posted: 7 Jan 2014 Last revised: 26 Oct 2017

See all articles by Christiaan van der Kwaak

Christiaan van der Kwaak

University of Amsterdam

Sweder van Wijnbergen

Universiteit van Amsterdam; Tinbergen Institute; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Date Written: September 19, 2017


We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized.

Keywords: Financial Intermediation, Macrofinancial Fragility, Fiscal Policy, Sovereign Default Risk

JEL Classification: E44, E62, H30

Suggested Citation

van der Kwaak, Christiaan and van Wijnbergen, Sweder, Financial Fragility and the Fiscal Multiplier (September 19, 2017). Tinbergen Institute Discussion Paper 14-004/VI/DSF70. Available at SSRN: or

Christiaan Van der Kwaak (Contact Author)

University of Amsterdam ( email )

Spui 21
Amsterdam, 1018 WB

Sweder Van Wijnbergen

Universiteit van Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
+31 20 525 4011 / 4203 (Phone)
+31-35-624 91 82 (Fax)

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA

Centre for Economic Policy Research (CEPR)

United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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