Economics seminar: Fiscal policy and lending relationships

When?

Wednesday 19 October 2011, 16:00 to 17:00

Where?

04AD00

Open to:

Public, Staff, Students

Speaker:

Dr. Giovanni Melina

Dr. Giovanni Melina (Surrey and Birkbeck)

"Fiscal policy and lending relationships" (with Stefania Villa)

Abstract

This paper studies how fiscal policy affects credit market conditions. First, it conducts a FAVAR analysis showing that the credit spread responds negatively to an expansionary government spending shock, while consumption, investment, and lending increase. Second, it illustrates that these results are not mimicked by a DSGE model where the credit spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it demonstrates that introducing deep habits in private and government consumption makes the model able to replicate empirics. Sensitivity checks and extensions show that core results hold for a number of model calibrations and specifications. The presence of banks exploiting lending relationships generates a financial accelerator effect in the transmission of fiscal shocks.