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Effects of Fiscal Policy on Credit Markets

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  • Auerbach, Alan J
  • Gorodnichenko, Yuriy
  • Murphy, Daniel

Abstract

Credit markets typically freeze in recessions: access to credit declines, and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in US federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.

Suggested Citation

  • Auerbach, Alan J & Gorodnichenko, Yuriy & Murphy, Daniel, 2020. "Effects of Fiscal Policy on Credit Markets," Department of Economics, Working Paper Series qt1qj0m1fb, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    • Handle: RePEc:cdl:econwp:qt1qj0m1fb
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    References listed on IDEAS

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    1. Daniel Murphy, 2015. "How Can Government Spending Stimulate Consumption?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 551-574, July.
    2. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    3. Ozgur Emre Ergungor, 2010. "Bank Branch Presence and Access to Credit in Low- to Moderate-Income Neighborhoods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1321-1349, October.
    4. Erik Hurst & Benjamin J. Keys & Amit Seru & Joseph Vavra, 2016. "Regional Redistribution through the US Mortgage Market," American Economic Review, American Economic Association, vol. 106(10), pages 2982-3028, October.
    5. Ozgur Emre Ergungor, 2010. "Bank Branch Presence and Access to Credit in Low‐ to Moderate‐Income Neighborhoods," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1321-1349, October.
    6. Erik P. Gilje & Elena Loutskina & Philip E. Strahan, 2016. "Exporting Liquidity: Branch Banking and Financial Integration," Journal of Finance, American Finance Association, vol. 71(3), pages 1159-1184, June.
    7. Loutskina, Elena, 2011. "The role of securitization in bank liquidity and funding management," Journal of Financial Economics, Elsevier, vol. 100(3), pages 663-684, June.
    8. John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
    9. Timothy J. Bartik, 1991. "Who Benefits from State and Local Economic Development Policies?," Books from Upjohn Press, W.E. Upjohn Institute for Employment Research, number wbsle, November.
    10. Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2019. "Local Fiscal Multipliers and Fiscal Spillovers in the United States," NBER Working Papers 25457, National Bureau of Economic Research, Inc.
    11. Jorge Miranda-Pinto & Daniel Murphy & Kieran James Walsh & Eric R. Young, 2019. "Saving Constraints, Debt, and the Credit Market Response to Fiscal Stimulus: Theory and Cross-Country Evidence," Discussion Papers Series 609, School of Economics, University of Queensland, Australia.
    12. Olivier Blanchard & Jonathan D. Ostry & Atish R. Ghosh & Marcos Chamon, 2016. "Capital Flows: Expansionary or Contractionary?," American Economic Review, American Economic Association, vol. 106(5), pages 565-569, May.
    13. Yuriy Gorodnichenko & Walker Ray, 2017. "The Effects of Quantitative Easing: Taking a Cue from Treasury Auctions," NBER Working Papers 24122, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Rüth, Sebastian K. & Simon, Camilla, 2022. "How do income and the debt position of households propagate fiscal stimulus into consumption?," Journal of Economic Dynamics and Control, Elsevier, vol. 143(C).
    2. Bredemeier, Christian & Juessen, Falko & Schabert, Andreas, 2022. "Why are fiscal multipliers moderate even under monetary accommodation?," European Economic Review, Elsevier, vol. 141(C).
    3. DeYoung, Robert & Jang, Karen Y., 2023. "Testing dividend tax theory: Firm and industry heterogeneity," Journal of Financial Intermediation, Elsevier, vol. 56(C).
    4. Hebous, Shafik & Zimmermann, Tom, 2021. "Can government demand stimulate private investment? Evidence from U.S. federal procurement," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 178-194.
    5. Andrea Cipollini & Francesco Frangiamore, 2023. "Government spending and credit market: Evidence from Italian (NUTS 3) provinces," Papers in Regional Science, Wiley Blackwell, vol. 102(1), pages 3-30, February.
    6. María Pía Olivero & Mikheil Dvalishvili, 2023. "What do fiscal stimulus packages mean for household debt?," Contemporary Economic Policy, Western Economic Association International, vol. 41(2), pages 282-299, April.
    7. Rüth, Sebastian K. & Simon, Camilla, 2020. "How Do Income and the Debt Position of Households Propagate Public into Private Spending?," Working Papers 0676, University of Heidelberg, Department of Economics.

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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