Fiscal Policy and Lending Relationships
IMF Working Papers, June 5, 2013
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Bibliographic details
- Authors: Giovanni Melina, Stefania Villa
- Published: June 5, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484380277.001
Overview
- Purpose: Study how fiscal policy affects loan market conditions in the US.
- Core result: An expansionary government spending shock reduces the bank spread and increases lending; lending relationships create a financial accelerator transmitting the fiscal shock.
Key Findings
- Structural Vector-Autoregression (SVAR) evidence:
- The bank spread responds negatively to an expansionary government spending shock.
- Lending increases following the expansionary government spending shock.
- Dynamic Stochastic General Equilibrium (DSGE) model evidence:
- A DSGE model that endogenizes the bank spread via a banking sector exploiting lending relationships reproduces the SVAR results.
- Friction and amplification:
- Lending relationships act as a friction that generates a financial accelerator effect in the transmission of the fiscal shock.
Methodology
- Empirical approach:
- Structural Vector-Autoregression analysis to identify the response of bank spreads and lending to government spending shocks.
- Theoretical approach:
- Dynamic Stochastic General Equilibrium model with an explicit banking sector where the bank spread is endogenized through lending relationships.
Mechanism Identified
- Lending relationships:
- Serve as a persistent interaction between banks and borrowers that affects loan pricing.
- Create a channel through which fiscal expansion lowers spreads and raises lending.
- Financial accelerator:
- The presence of lending-relationship frictions amplifies the effects of fiscal shocks on credit conditions and lending volumes.
Subject Tags and Keywords (as provided)
- Subjects: Banking, Consumption, Expenditure, Financial institutions, Government consumption, Loans, National accounts, Private consumption
- Keywords: boosting lending, Consumption, consumption crowding in, deep habits, Fiscal policy, Global, Government consumption, government consumption expenditure, government spending, government spending expansion, government spending shock, lending relationship, lending relationships, Loans, market condition, Private consumption, relationship duration, WP
Fiscal Policy and Lending Relationships — Giovanni Melina, Stefania Villa; June 5, 2013.