Government Size and Business Cycle Volatility: How Important are Credit Constraints?

Markus Leibrecht and Johann Scharler

Economica, 2015, vol. 82, issue 326, 201-221

Abstract: type="main" xml:id="ecca12103-abs-0001">

In this paper we analyse how the availability of credit influences the relationship between government size as a proxy for fiscal stabilization policy and the amplitude of business cycle fluctuations in a sample of advanced OECD countries. Interpreting relatively low loan-to-value ratios as an indication of tight credit constraints, we find that government size exerts a stabilizing effect on output and consumption growth fluctuations only when credit constraints are relatively tight. Our results provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy.

Date: 2015
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Working Paper: Government Size and Business Cycle Volatility; How Important Are Credit Constraints? (2012)
Working Paper: Government Size and Business Cycle Volatility; How Important Are Credit Constraints? (2012)
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