Working Paper: CEPR ID: DP9175
Authors: Robert Kollmann; Marco Ratto; Werner Roeger; Jan Int Veld
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 macro 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.
Keywords: Bank Rescue Measures; Financial Crisis; Fiscal Policy
JEL Codes: E32; E62; F41; G21; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Government support for banks (G21) | Stabilization of output, consumption, and investment (E20) |
| Increased government purchases (H59) | Stabilization of output and crowding out of consumption (E21) |
| Higher transfers to households (H31) | Positive impact on private consumption (D12) |
| Higher transfers to households (H31) | Negligible effect on output and investment (E22) |
| Banking shocks and increased government spending (E62) | Rise in the public debt-to-GDP ratio (H69) |