Fiscal capacity and commercial bank lending under COVID-19

Joshua Aizenman, Yothin Jinjarak, Mark M. Spiegel

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.

Original languageEnglish
Article number101261
JournalJournal of the Japanese and International Economies
Volume68
DOIs
StatePublished - 1 Jun 2023
Externally publishedYes

Keywords

  • Bank lending
  • COVID-19
  • Fiscal capacity

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Political Science and International Relations

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