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Fiscal Multipliers and Financial Crises
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 9.16%. 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.
Cite this item
Miguel Faria-e-Castro, Fiscal Multipliers and Financial Crises, Federal Reserve Bank of St. Louis, Working Papers 2018-23, 01 Oct 2018, revised 04 Jun 2019.
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
- G01 - Financial Economics - - General - - - Financial Crises
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Keywords: fiscal multipliers; financial crisis; bailouts; nonlinear methods
This item with handle RePEc:fip:fedlwp:2018-023
is also listed on EconPapers
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