Fiscal Capacity and Commercial Bank Lending Under COVID-19

Joshua Aizenman, Yothin Jinjarak and Mark Spiegel

No 2022-04, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.

Keywords: fiscal multipliers; COVID-19; bank lending (search for similar items in EconPapers)
JEL-codes: E62 F34 G21 H30 (search for similar items in EconPapers)
Pages: 51
Date: 2023-03-01
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Fiscal capacity and commercial bank lending under COVID-19 (2023)
Working Paper: Fiscal Capacity and Commercial Bank Lending Under COVID-19 (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:93788

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DOI: 10.24148/wp2022-04

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