1. Melina: Department of Economics, Social Sciences Building, City University London, Whiskin Street, London, EC1R 0JD, UK. Phone +44 20 7040 4522, Fax +44 20 7040 8580, E-mail
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    1. Villa: Department of Economics, University of Foggia, 71100 Foggia, Italy; Center for Economic Studies, KU Leuven, Leuven, Belgium. Phone +39-0881-753713, Fax +39-0881-781771, E-mail
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    • Part of this work has been done when Giovanni Melina was working at the IMF. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or IMF policy. We are grateful to Yunus Aksoy for giving us the input of modeling the banking sector as lending relationships. The paper has benefited from extensive comments by Fabio Canova and econometric suggestions by Ron Smith. We are also grateful to John Driffill, Matteo Iacoviello, Paul Levine, Andrew Mountford, Francesco Nucci, Peter Sinclair, Frank Smets, Timo Trimborn, Jaejoon Woo, Stephen Wright, two anonymous referees, conference participants at the 2012 Annual Meeting of the American Economic Association, the 18th SCE International CEF Conference, the Royal Economic Society 2011 Annual Conference, the 16th Spring Meeting of Young Economists, the 52nd Annual Conference of the Italian Economic Association as well as seminar participants at Aarhus University, Birkbeck College, the Bank of England, the Bank of Spain, the Reserve Bank of New Zealand, the University of Bath, the University of Glasgow and University of Surrey for useful comments and suggestions. Giovanni Melina acknowledges financial support from ESRC project RES-062-23-2451. The usual disclaimerapplies.


This paper studies how fiscal policy affects loan market conditions in the United States. First, it conducts a structural vector-autoregression analysis showing that the bank spread responds negatively to an expansionary government spending shock, while lending increases. Second, it illustrates that these results are mimicked by a dynamic stochastic general equilibrium model where the bank spread is endogenized via the inclusion of a banking sector exploiting lending relationships. Third, it shows that lending relationships represent a friction that generates a financial accelerator effect in the transmission of the fiscal shock. (JEL E44, E62)