Fiscal Policy and Credit Supply: The Procurement Channel
50 Pages Posted: 8 Jul 2021 Last revised: 14 Nov 2022
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Fiscal Policy and Credit Supply: The Procurement Channel
Fiscal policy and credit supply: The procurement channel
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: Suggested Citation