Fiscal Multipliers and Financial Crises

RePEc Short ID: pfa225
ORCID iD: 0000-0002-3759-2172

Faria-e-Castro, Miguel

doi:10.20955/wp.2018.023

Working Paper Revision

Fiscal Multipliers and Financial Crises

Abstract: What type of fiscal policy is most effective during a financial crisis? I study the macroeconomic effects of the US fiscal policy response to the Great Recession, accounting not only for standard tools such as government purchases and transfers but also for financial sector interventions such as bank recapitalizations and credit guarantees. A nonlinear quantitative model calibrated to the US allows me to study the state-dependent effects of different types of fiscal policies. I combine the model with data on the US fiscal policy response to find that the fall in aggregate consumption would have been 50% worse in the absence of that response with a cumulative loss of 9.68%. Transfers and bank recapitalizations yielded the largest fiscal multipliers at the height of the crisis, due to new transmission channels that arise from linkages between household and bank balance sheets.

Keywords: financial crisis; bailouts; nonlinear methods; fiscal multipliers;

JEL Classification: E4; E6; G01; G28;

https://doi.org/10.20955/wp.2018.023