Fiscal policy and lending relationships (Melina G., Villa S.)

Bank Profitability Bank Systems Bank-Borrower Relationships

Abstract This paper studies how fiscal policy affects loan market conditions. 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 Real Business Cycle 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.
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Libref/ Melina G., Villa S. (2012) “Fiscal policy and lending relationships”, pp. 1-23
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