Title: The Amplification of a Fiscal Stimulus through Banks’ Branch Networks, (Jim Goldman, Raj Iyer and Ramana Nanda)
Abstract: We study the role of the banking system in amplifying the impact of increased fiscal spending. Exploiting large increases in US defense spending that followed the 9/11 attacks, we first show that the increased economic activity this spending induced also led to a decline in non-performing loans at bank branches in these counties. In turn, banks increased lending to small businesses in other counties with no direct exposure to the fiscal spending increase. On average, a 10-percentage point increase in a bank's fraction of branches in directly exposed counties was related to an 8-9% increase in small business lending in not-directly-exposed counties, with the effect driven by constrained banks who benefited most from the decline in non-performing loans. Since the financial sector is likely to also be stressed when a fiscal stimulus may be needed, our results highlight the potential importance of this ‘credit multiplier’ when considering the overall impact of a fiscal stimulus on the real economy.