Fiscal Policies and Credit Regimes: A TVAR Approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract Terms of use: Documents in EconStor mayIn the present work we investigate how the state of credit markets non-linearly affects the impact of fiscal policies. We estimate a Threshold Vector Autoregression (TVAR) model on U.S quarterly data for the period 1984-2010. We employ the spread between BAA-rated corporate bond yield and 10-year treasury constant maturity rate as a proxy for credit conditions. We find that the response of output to fiscal policy shocks are stronger and more persistent when the economy is in the "tight" credit regime. The fiscal multipliers are abundantly and persistently higher than one when firms face increasing financing costs, whereas they are feebler and often lower than one in the "normal" credit regime. On the normative side, our results suggest policy makers to carefully plan fiscal policy measures according to the state of credit markets.JEL Codes: J32, E32, E44, E62

Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-Based Model with Credit Rationing

“…These above dynamics are in line with recent empirical findings (e.g. Ferraresi, Roventini, and Fagiolo, 2014), that suggest the fact that fiscal policy is more effective in tighter credit regimes. Again, government consumption can dampen the perverse dynamics triggered by a rise in inequality, and this is why we observe a lower fraction of constrained borrowers for higher fiscal intensity parameters.…”

“…Auerbach and Gorodnichenko, 2012) and the influence of credit regimes on fiscal policy effectiveness (e.g. Ferraresi, Roventini, and Fagiolo, 2014). We do so by building an agent-based model where permanent inequality shocks produce large and persistent falls in aggregate output by generating a high fraction of credit-constrained consumers.…”

Tax shocks with high and low uncertainty

“…Second, when we compute GIRFs for the main specification, following e.g. Ferraresi, Roventini, and Fagiolo (2014), we find that results are fully analogous to results obtained via classic IRFs, which implies that the implicit assumption of no shock-induced regime shifts holds. Finally, confidence bands for the impulse responses are computed by bootstrapping the residuals from the nonlinear model, with the threshold defining regimes kept fixed during the bootstrap.…”

Fiscal Multipliers in Recessions

“…More direct, complementary empirical evidence that the size of multipliers varies with credit markets ‘tightness’ is provided by Ferraresi et al . (forthcoming). They estimate a threshold vector autoregression (TVAR) model on US data for the period 1984–2010, employing the spread between BAA‐rated corporate bond yield and 10‐year treasury constant maturity rate as a proxy for credit conditions.…”