Amplifying a fiscal stimulus: the role of banks
File(s)
Accepted version
Author(s)
Goldman, Jim
Iyer, Rajkamal
Nanda, Ramana
Type
Journal Article
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.
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.
Date Acceptance
2026-08-28
Citation
Journal of Finance
ISSN
0022-1082
Publisher
Wiley
Journal / Book Title
Journal of Finance
Copyright Statement
Copyright This paper is embargoed until publication. Once published the author’s accepted manuscript will be made available under a CC-BY License in accordance with Imperial’s Research Publications Open Access policy (www.imperial.ac.uk/oa-policy).
License URL
Publication Status
Accepted