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Fiscal consolidations and the cost of credit

Şenay Ağca and Deniz Igan

Journal of International Economics, 2019, vol. 120, issue C, 84-108

Abstract: Using loan-level data covering 15 advanced economies over 1990–2014, we show that the cost of credit increases with fiscal consolidations. This increase is observed with both tax hikes and spending cuts, and is smaller when the consolidation is large. The cost of credit goes up with tax hikes that apply to a particular sector, but not with spending cuts that are directed at a certain sector. Firms that face higher costs tend to be small, highly leveraged, domestic, government dependent, and financially constrained. Hence, there may be costs associated with fiscal consolidations—beyond the aggregate-demand channel—borne primarily by firms operating in sectors directly affected by the consolidation measures and by those that have limited access to international markets and alternative financing sources.

Keywords: Fiscal policy; Sovereign debt; Cost of credit; Corporate loans (search for similar items in EconPapers)
JEL-codes: E62 G28 G32 H32 H60 (search for similar items in EconPapers)
Date: 2019
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