Fiscal policy and credit supply in a crisis

Diana Bonfim; Miguel A. Ferreira; Francisco Queiró; Sujiao (Emma) Zhao

doi:10.1257/aer.20221499

Fiscal policy and credit supply in a crisis

Diana Bonfim^*, Miguel A. Ferreira, Francisco Queiró, Sujiao (Emma) Zhao

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

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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.

Original language	English
Pages (from-to)	1896-1935
Number of pages	40
Journal	American Economic Review
Volume	115
Issue number	6
DOIs	https://doi.org/10.1257/aer.20221499
Publication status	Published - Jun 2025

Keywords

E23
E44
E62
G01
G21
H57

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

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CUBE: Católica Lisbon Research Unit in Business and Economics
Machado, F. (PI), Aranda, A. M. (Researcher), Costa, A. I. D. A. (Researcher), Martins, A. P. (Researcher), Bernard, A. (Researcher), Fidalgo, A. (Researcher), Reis, C. (Researcher), Abecassis-Moedas, C. (Researcher), Santos, C. (Researcher), Tran, D. (Researcher), Fernandes, D. (Researcher), Bonfim, D. (Researcher), Schliephake, E. (Researcher), Kalogirou, F. (Researcher), Reis, F. (Researcher), Santos, F. (Researcher), Machado, F. (Researcher), Sguera, F. (Researcher), Cerqueiro, G. (Researcher), Reis, H. (Researcher), Barreto, I. (Researcher), Silva, J. (Researcher), Salvado, J. C. (Researcher), Neves, J. C. D. (Researcher), Gijsbrechts, J. (Researcher), Stahl, J. (Researcher), Guedes, J. C. (Researcher), Faias, J. (Researcher), Wagner, L. (Researcher), Correia, I. (Researcher), Saldanha, M. F. (Researcher), Fontes, J. C. (Researcher), Modesto, L. (Researcher), Meira, M. (Researcher), Matos, M. G. D. (Researcher), Gouveia, M. (Researcher), Kozeniauskas, N. (Researcher), Bertani, N. (Researcher), Couzoff, P. (Researcher), Barroso, P. (Researcher), Encarnação, P. (Researcher), Raposo, P. (Researcher), Teles, P. (Researcher), Bastos, W. (Researcher), Bohnsack, R. (Researcher), Vale, R. C. D. (Researcher), Ferreira, R. (Researcher), Lloyd-Braga, T. (Researcher), Ramus, T. (Researcher), Colaço, V. H. (Researcher), Cavicchini, A. (Researcher), Parada, P. (Researcher), Pieters, R. (Researcher), Pinto, F. A. G. D. L. S. (Researcher), Colaço, V. H. (Researcher) & Venter, Z. (Researcher)
1/01/20 → 31/12/25
Project: Research

Cite this

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title = "Fiscal policy and credit supply in a crisis",

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.",

keywords = "E23, E44, E62, G01, G21, H57",

author = "Diana Bonfim and Ferreira, \{Miguel A.\} and Francisco Queir{\'o} and Zhao, \{Sujiao (Emma)\}",

year = "2025",

month = jun,

doi = "10.1257/aer.20221499",

language = "English",

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pages = "1896--1935",

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AB - 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.

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KW - E44

KW - E62

KW - G01

KW - G21

KW - H57

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DO - 10.1257/aer.20221499

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VL - 115

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EP - 1935

JO - American Economic Review

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ER -

Fiscal policy and credit supply in a crisis

Abstract

Keywords

UN SDGs

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CUBE: Católica Lisbon Research Unit in Business and Economics

Cite this