Title: Fiscal policy, banks and the financial crisis. National Bank of Belgium Working Paper No. 234, October 2012
Abstract: This paper studies the effectiveness of Euro Area (EA) fiscal policy, during the recent
financial crisis, using an estimated New Keynesian model with a bank. A key dimension of
policy in the crisis was massive government support for banks—that dimension has so far
received little attention in the macroeconomics literature. We use the estimated model to
analyze the effects of bank asset losses, of government support for banks, and other fiscal
stimulus measures, in the EA. Our results suggest that support for banks had a stabilizing
effect on EA output, consumption and investment. Increased government purchases helped to
stabilize output, but crowded out consumption. Higher transfers to households had a positive
impact on private consumption, but a negligible effect on output and investment. Banking
shocks and increased government spending explain half of the rise in the public debt/GDP
ratio since the onset of the crisis.
Publication Year: 2012
Publication Date: 2012-10-01
Language: en
Type: article
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