Fiscal policy and credit supply: The procurement channel

Diana Bonfim, Miguel A. Ferreira, Francisco Queiró and Sujiao (Emma) Zhao

Nova SBE Working Paper Series from Universidade Nova de Lisboa, Nova School of Business and Economics

Abstract: We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3% of GDP.We find that this cut saddled banks with non-performing loans from government contractors, which led to a reduction in credit supply to other firms. The credit supply shock, in turn, caused firm output to decline. In a general equilibrium model, our firm-level estimates imply an aggregate elasticity of credit supply with respect to aggregate demand of 1.6 and a credit-driven fiscal multiplier of 0.6.

Keywords: Credit supply; Government procurement; Investment; Employment; Financial crises; Bank-sovereign loop; Austerity (search for similar items in EconPapers)
JEL-codes: G01 G20 G31 H57 (search for similar items in EconPapers)
Pages: 79 pages
Date: 2023
New Economics Papers: this item is included in nep-eec and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:unl:unlfep:wp644

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