Working Paper: NBER ID: w26655
Authors: Alan J. Auerbach; Yuriy Gorodnichenko; Daniel Murphy
Abstract: 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.
Keywords: Fiscal Policy; Credit Markets; Government Spending
JEL Codes: E32; E43; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Department of Defense (DoD) spending (H56) | local interest rates on consumer loans (E43) |
| liquidity injection from increased DoD spending (H56) | local interest rates on consumer loans (E43) |
| reduction in lenders' perceived riskiness of local borrowers (G21) | local interest rates on consumer loans (E43) |
| Department of Defense (DoD) spending (H56) | liquidity injection into the local economy (E44) |
| Department of Defense (DoD) spending (H56) | reduction in lenders' perceived riskiness of local borrowers (G21) |
| outlays associated with new production (D25) | local interest rates on consumer loans (E43) |
| increased worker earnings and expectations of future income (J39) | reduction in perceived risk (D81) |
| government spending (H59) | stimulate credit provision (E51) |