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On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?

Author

Listed:
  • Kelly, Robert

    (Central Bank of Ireland)

  • McQuinn, Kieran

    (Central Bank of Ireland)

Abstract

Recently, some notable contributions suggest, that discretionary fiscal policy can be an effective and self- financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears. Loan loss forecasts over the period 2012-2014 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-á-vis its main financial institutions, may have significant implications for the fiscal multiplier.

Suggested Citation

  • Kelly, Robert & McQuinn, Kieran, 2013. "On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?," Research Technical Papers 01/RT/13, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:01/rt/13
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    References listed on IDEAS

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    1. repec:cbi:qtbart:y:2014:m:010:p:60-70 is not listed on IDEAS
    2. Rory McElligott & Martin O'Brien, 2014. "The evolution of loan level data in Ireland," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the Porto Workshop on "Integrated management of micro-databases", volume 37, pages 18-23, Bank for International Settlements.
    3. Linn, Andrew & Kelly, Anne-Marie & Bailey, Samuel, 2014. "Irish Residential Mortgage-Backed Securities – Preliminary Analysis of Loan-Level Data," Quarterly Bulletin Articles, Central Bank of Ireland, pages 60-70, October.

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    More about this item

    Keywords

    House prices; unemployment; mortgage arrears; fiscal multiplier;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics

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