American Economic Review Vol. 115 No. 6 2025

Fiscal Policy and Credit Supply in a Crisis

Diana Bonfim¹; Miguel A. Ferreira²; Francisco Queiró³; Sujiao Zhao⁴

¹ Banco de Portugal, ECB, Católica Lisbon, and CEPR (email: ) · ² Nova School of Business and Economics, ECGI, and CEPR (email: ) · ³ Nova School of Business and Economics (email: ) · ⁴ Banco de Portugal and Cef.Up (email: )

Abstract

We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3 percent of GDP. We find that this cut saddled banks with nonperforming loans from government contractors, which led to a persistent reduction in credit supply to other firms. We estimate a bank-level elasticity of credit supply with respect to procurement demand of 2.5. In a general equilibrium model, our findings point to large effects of fiscal policy on credit supply and output in a crisis.

DOI

10.1257/aer.20221499

Volume

115

Issue

6

Pages

1896-1935

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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