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Project

Fiscal Policy, Credit Cycles, and the Macroeconomy.

The global financial crisis reignited interest in understanding how credit fluctuations affect macroeconomic outcomes. It is now widely recognized that private debt cycles shape macroeconomic fragility and crisis risk. In response to the crisis, many countries adopted countercyclical fiscal policy, which moved government spending, taxation, and deficit financing to the forefront of policy debates. The aim of this project is to understand the interplay of credit cycle fluctuations, business cycle fluctuations, and fiscal policy. First, we will develop a business cycle model in which household debt matters for the propagation and amplification of fiscal interventions. The model will be used to test the significance and magnitude of the private debt ccelerator effect with respect to fiscal policy changes.Counterfactual policy simulations will provide insights into how the credit cycle influences the fiscal transmission mechanism. The second part of the project will explore how fiscal policy by itself shapes private credit cycles. In particular, we will provide evidence on the effects of fiscal policy shocks on credit growth. Finally, we will turn to systematic (rule-based) stabilization policy and explore whether there is a trade-off between business cycle stabilization and credit cycle stabilization. Understanding the interplay between fiscal policy and credit cycles would be of great value for the design of policies aiming to promote macroeconomic and financial stability.
Date:1 May 2020 →  Today
Keywords:MACRO ECONOMICS, MONETARY AND FISCAL POLICY, BUSINESS CYCLES, CREDIT
Disciplines:Consumption, saving, production, investment, labour markets and informal economy, Macroeconomic policy, macroeconomic aspects of public finance and general outlook, Monetary policy, central banking and the supply of money and credit, Prices, business fluctuations and cycles