Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2014-01-14
Revision-Date: 2017-09-19
Number: 14-004/VI/DSF70
Author-Name: Sweder van Wijnbergen
Author-Workplace-Name: University of Amsterdam
Author-Name: Christiaan van der Kwaak
Author-Workplace-Name: University of Amsterdam
Title: Financial Fragility and the Fiscal Multiplier
Abstract: We investigate the effectiveness of fiscal stimuli when banks are undercapitalized and have large holdings of government bonds subject to sovereign default risk. Deficit-financed government purchases then crowd out private expenditure and fiscal multipliers can turn negative. Crowding out increases for longer maturity bonds and higher sovereign default risk. We estimate a DSGE model with financial frictions for Spain and find that investment crowding out indeed leads to a negative cumulative fiscal multiplier. When monetary policy is exogenous, like at the ZLB or in a currency union, fiscal stimuli become more effective but multipliers are reduced when banks are undercapitalized.
Classification-JEL: E44, E62, H30
Keywords: Financial Intermediation, Macrofinancial Fragility, Fiscal Policy, Sovereign Default Risk
File-Url: https://papers.tinbergen.nl/14004.pdf
File-Format: application/pdf
File-Size: 974542 bytes
Handle: RePEc:tin:wpaper:20140004