Do sovereign-bank inter-linkages affect the net cost of a fiscal stimulus? ESRI Research Bulletin 2015/1/4

Kelly, Robert and McQuinn, Kieran (2015) Do sovereign-bank inter-linkages affect the net cost of a fiscal stimulus? ESRI Research Bulletin 2015/1/4. UNSPECIFIED.

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Abstract

In this paper, we illustrate that sovereign-bank inter-linkages can have an impact on the fiscal multiplier. As an example we show how a fiscal stimulus, which returns out-of-work mortgaged households to employment, alleviates the solvency pressures of Irish financial institutions and consequently reduces their estimated future capital requirements. We use an empirical framework consisting of a house price model, a recently developed credit risk model of the Irish mortgage market and the output of a large scale structural model to quantify the savings in future capital requirements of such a stimulus.

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