On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?

Robert Kelly and Kieran McQuinn

No 01/RT/13, Research Technical Papers from Central Bank of Ireland

Abstract: Recently, some notable contributions suggest, that discretionary fiscal policy can be an effective and self- financing policy option in the presence of extreme macroeconomic conditions. Given the special relationship between the Irish sovereign and its main financial institutions, this paper assesses the implications for the Irish fiscal accounts of certain macroeconomic policy responses. Using a comprehensive empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears. Loan loss forecasts over the period 2012-2014 are then generated for the mortgage book of the main Irish financial institutions under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, improve the solvency position of the guaranteed Irish institutions thereby reducing the sovereign’s future capital obligations. Thus, the unique situation the sovereign finds itself in vis-á-vis its main financial institutions, may have significant implications for the fiscal multiplier.

Keywords: House prices; unemployment; mortgage arrears; fiscal multiplier (search for similar items in EconPapers)
JEL-codes: C58 G21 R30 (search for similar items in EconPapers)
Date: 2013-03
New Economics Papers: this item is included in nep-ban and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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