Fiscal Multipliers and Financial Crises

Miguel Faria-e-Castro

No 300, 2017 Meeting Papers from Society for Economic Dynamics

Abstract: What is the impact of an extra dollar of government spending during a financial crisis? How important was U.S. fiscal policy during the Great Recession? I develop a macroeconomic model of fiscal policy with a financial sector that allows me to study the effects of fiscal policy tools such as government purchases and transfers, as well as of financial sector interventions such as bank recapitalizations and credit guarantees. Solving the model with nonlinear methods allows me to show how the linkages between household and bank balance sheets generate new channels through which fiscal policy can stimulate the economy, and study the state dependent effects of fiscal policy. I combine the model with data to assess the impact of the fiscal policy response during the financial crisis and Great Recession. My main findings are that: (i) the fall in consumption would have been 50% worse in the absence of fiscal interventions; and (ii) transfers to households and bank recapitalizations yielded the largest fiscal multipliers.

Date: 2017
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (15)

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Related works:
Journal Article: Fiscal Multipliers and Financial Crises (2024)
Working Paper: Fiscal Multipliers and Financial Crises (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:300

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