Government size and business cycle volatility: How important are credit constraints?

Leibrecht, M. and Scharler, J. (2015) Government size and business cycle volatility: How important are credit constraints? Economica, 82 (326). pp. 201-221. ISSN 1468-0335 doi: 10.1111/ecca.12103

Abstract/Summary

In this paper we analyse how the availability of credit influences the relationship between government size as a proxy for fiscal stabilization policy and the amplitude of business cycle fluctuations in a sample of advanced OECD countries. Interpreting relatively low loan-to-value ratios as an indication of tight credit constraints, we find that government size exerts a stabilizing effect on output and consumption growth fluctuations only when credit constraints are relatively tight. Our results provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy.