Fiscal Policy and Credit Supply: The Procurement Channel

50 Pages Posted: 8 Jul 2021 Last revised: 14 Nov 2022

See all articles by Diana Bonfim

Diana Bonfim

Banco de Portugal; Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Francisco Queiro

Nova School of Business and Economics

Sujiao Zhao

Bank of Portugal - Department of Economics; Universidade do Porto - Faculdade de Economia (FEP)

Multiple version iconThere are 2 versions of this paper

Date Written: November 12, 2022

Abstract

We show that bank credit exposure to firms with public procurement contracts can amplify fiscal multipliers during a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3\% of GDP. We find that this cut saddled banks with non-performing loans from firms with procurement contracts, which led to a reduction in credit supply to other firms. The credit supply shock in turn caused firm output to decline. Abstracting from general equilibrium effects, our estimates can account for a quarter of the output loss during the crisis, and imply a credit-driven fiscal multiplier of 0.4.

Keywords: Credit supply, Financial crises, Fiscal policy, Public procurement, Fiscal multipliers, Bank-sovereign loop

JEL Classification: G10, G20, G31, H57

Suggested Citation

Bonfim, Diana and Ferreira, Miguel Almeida and Queiro, Francisco and Zhao, Sujiao, Fiscal Policy and Credit Supply: The Procurement Channel (November 12, 2022). Available at SSRN: https://ssrn.com/abstract=3873264 or http://dx.doi.org/10.2139/ssrn.3873264

Diana Bonfim

Banco de Portugal ( email )

Av Almirante Reis, 71
P-1150-012 Lisboa
Portugal

Catholic University of Portugal (UCP) - Catolica Lisbon School of Business and Economics ( email )

Palma de Cima
Lisbon, 1649-023
Portugal

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Francisco Queiro

Nova School of Business and Economics ( email )

Campus de Carcavelos
Rua da Holanda, 1
Carcavelos, 2775-405
Portugal

Sujiao Zhao

Bank of Portugal - Department of Economics ( email )

Rua do Almada, 71
Porto, 4050-036
Portugal

Universidade do Porto - Faculdade de Economia (FEP) ( email )

Rua Roberto Frias
s/n
Porto, 4200-464
Portugal

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