Amplifying a Fiscal Stimulus: The Role of Banks
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SeriesErasmus Finance Seminars
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Speaker(s)Ramana Nanda (Imperial College London, United Kingdom)
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FieldFinance, Accounting and Finance
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LocationErasmus University Rotterdam, Campus Woudestein, Polak 3-09
Rotterdam -
Date and time
November 12, 2024
11:45 - 13:00
Abstract
Exploiting increases in US defence spending following the 9/11 attacks, we show that the procurement-driven fiscal stimulus led to lower non-performing loans at banks. In turn, constrained banks responded by increasing lending to small businesses in not-directly-impacted counties. We find the additional economic activity enabled by the increased lending capacity is quantitatively important – amplification from this ‘credit multiplier’ is about 10%-15% as large as typical fiscal multipliers estimated in the literature. Since intermediaries are more likely to face constraints in times when a fiscal stimulus is needed, this ’credit multiplier’ can substantially amplify a stimulus’ overall impact in downturns. Joint paper with Jim Goldman and Rajkamal Iyer.