DP8829 Fiscal Policy in a Financial Crisis: Standard Policy vs. Bank Rescue Measures

Author(s): Robert Kollmann, Werner Roeger, Jan in't Veld
Publication Date: February 2012
Keyword(s): financial crisis, fiscal stimulus, real activity, state support for banks
JEL(s): E62, E63, G21, G28, H25
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=8829

A key dimension of fiscal policy during the financial crisis was massive government support for the banking system. The macroeconomic effects of that support have, so far, received little attention in the literature. This paper fills this gap, using a quantitative dynamic model with a banking sector. Our results suggest that state aid for banks may have a strong positive effect on real activity. Bank state aid multipliers are in the same range as conventional fiscal spending multipliers. Support for banks has a positive effect on investment, while a rise in government purchases crowds out investment.