Fiscal Policy and Lending Relationships

This paper studies how fiscal policy affects loan market conditions in the US. First, itconducts a Structural Vector-Autoregression analysis showing that the bank spread respondsnegatively to an expansionary government spending shock, while lending increases. Second,it illustrates that these results are mimicked by a Dynamic Stochastic General Equilibriummodel where the bank spread is endogenized via the inclusion of a banking sector exploitinglending relationships. Third, it shows that lending relationships represent a friction thatgenerates a financial accelerator effect in the transmission of the fiscal shock.