Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures
15 Pages Posted: 1 Mar 2012
Date Written: February 2012
Abstract
A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.
Keywords: financial crisis, fiscal stimulus, real activity, state support for banks
JEL Classification: E62, E63, G21, G28, H25
Suggested Citation: Suggested Citation
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