Fiscal Policy and Lending Relationships

Abstract

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

Keywords: Fiscal policy, United States, Banking sector, Loans, Economic models, government spending, deep habits, lending relationships, fiscal policy, fiscal stimulus, government spending shocks, budget constraint, fiscal shocks, fiscal shock, government expenditure, government consumption expenditure, discretionary fiscal policy, fiscal expansion, fiscal multipliers, consumption expenditure, government expenditures, consumption expenditures, aggregate demand, private consumption, general equilibrium, fiscal expansions, public expenditures, consumption decisions, local government spending, tax policy, taxation, government purchases, government spending multipliers, consumption goods, fiscal rules

JEL Classification: E62