Fiscal Capacity and Commercial Bank Lending Under COVID-19
Joshua Aizenman,
Yothin Jinjarak and
Mark Spiegel
No 29882, NBER Working Papers from National Bureau of Economic Research, Inc
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.
JEL-codes: E62 F34 G21 H30 (search for similar items in EconPapers)
Date: 2022-03
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Published as Joshua Aizenman & Yothin Jinjarak & Mark M. Spiegel, 2023. "Fiscal capacity and commercial bank lending under COVID-19," Journal of the Japanese and International Economies, vol 68.
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Journal Article: Fiscal capacity and commercial bank lending under COVID-19 (2023) 
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