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Fiscal policy, banks and the financial crisis

Author

Listed:
  • Robert Kollmann

    (ECARES, Université Libre de Bruxelles
    Université Paris-Est
    CEPR)

  • Marco Ratto

    (Joint Research Centre, European Commission)

  • Werner Roeger

    (DG-ECFIN, European Commission)

  • Jan in't Veld

    (DG-ECFIN, European Commission)

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.

Suggested Citation

  • Robert Kollmann & Marco Ratto & Werner Roeger & Jan in't Veld, 2012. "Fiscal policy, banks and the financial crisis," Working Paper Research 234, National Bank of Belgium.
    • Handle: RePEc:nbb:reswpp:201210-234
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    financial crisis; bank rescue measures; fiscal policy;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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