Fiscal policy and lending relationships

Melina, G. & Villa, S. (2014). Fiscal policy and lending relationships. Economic Inquiry, 52(2), pp. 696-712. doi: 10.1111/ecin.12051

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Abstract

This paper studies how fiscal policy affects loan market conditions in the US. First, it conducts a Structural Vector-Autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a Dynamic Stochastic General Equilibrium model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock.

Item Type: Article
Additional Information: This is the accepted version of the following article: MELINA, G. and VILLA, S. (2014), FISCAL POLICY AND LENDING RELATIONSHIPS. Economic Inquiry, 52: 696–712, which has been published in final form at http://dx.doi.org/doi: 10.1111/ecin.12051
Uncontrolled Keywords: Fiscal policy, deep habits, bank spread, lending relationships
Subjects: H Social Sciences > HB Economic Theory
Divisions: School of Social Sciences > Department of Economics
URI: http://openaccess.city.ac.uk/id/eprint/3773

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