Effects of Fiscal Policy on Credit Markets
Credit markets typically freeze in recessions: access to credit declines and the cost of credit increases. A conventional policy response is to rely on monetary tools to saturate financial markets with liquidity. Given limited space for monetary policy in the current economic conditions, we study how fiscal stimulus can influence local credit markets. Using rich geographical variation in U.S. federal government contracts, we document that, in a local economy, interest rates on consumer loans decrease in response to an expansionary government spending shock.
This paper was presented at the 2020 annual meeting of the American Economic Association in San Diego. We are grateful to our discussants Gabriel Chodorow-Reich and Janice Eberly as well as Frank Smets for comments on an earlier draft. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
- Rising Department of Defense outlays in a community are associated with lower auto and home equity loan rates, perhaps because they...
Alan J. Auerbach & Yuriy Gorodnichenko & Daniel Murphy, 2020. "Effects of Fiscal Policy on Credit Markets," AEA Papers and Proceedings, American Economic Association, vol. 110, pages 119-124, May. citation courtesy of