Government Size and Business Cycle Volatility: How Important are Credit Constraints?

In: Economica, Band 82, Heft 326, S. 201-221

Abstract

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.