"Amplifying a Fiscal Stimulus: The Role of Banks"

Abstract: Exploiting increases in US defense 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.

Read the paper