Fiscal Capacity and Commercial Bank Lending Under COVID-19


Joshua Aizenman

Yothin Jinjarak

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2022-04 | March 1, 2023

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.

Article Citation

Aizenman, Joshua, Mark M. Spiegel, and Yothin Jinjarak. 2022. “Fiscal Capacity and Commercial Bank Lending Under COVID-19,” Federal Reserve Bank of San Francisco Working Paper 2022-04. Available at

About the Author
Mark Spiegel
Mark Spiegel is a senior policy advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Mark Spiegel