TAILIEUCHUNG - Government size and business cycle volatility; How important are credit constraints?

The most fundamental issue connected to credit scoring is the level of accuracy of the information that forms the basis for the scores. Regardless of whether lending and pricing decisions are made by a manual or automated review of a consumer’ s credit, the potential for inaccuracies in credit reports to result in loan denials or higher borrowing costs is a cause for concern. Several organizations have conducted studies and surveys to quantify the pervasiveness of credit report errors, with widely ranging findings regarding how many credit reports contain errors (from to 70%). A. | Government size and business cycle volatility How important are credit constraints Markus Leibrecht Johann Scharler Working Papers in Economics and Statistics 2012-04 Research Platform eeecon Empirical and Experimental Economics University of Innsbruck http University of Innsbruck Working Papers in Economics and Statistics The series is jointly edited and published by Department of Economics Department of Public Finance Department of Statistics Contact Address University of Innsbruck Department of Public Finance Universitaetsstrasse 15 A-6020 Innsbruck Austria Tel 43 512 507 7171 Fax 43 512 507 2788 e-mail eeecon@ The most recent version of all working papers can be downloaded at http wopec For a list of recent papers see the backpages of this paper. Government Size and Business Cycle Volatility How Important Are Credit Constraints Markus Leibrecht Johann Scharlery Abstract In this paper we analyze 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 for 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 are robust with respect to different measures of government size and provide support for the hypothesis that credit market frictions play a crucial role in the transmission of fiscal policy. Keywords Business cycle volatility fiscal policy stabilization policy JEL codes E62 E32 Leuphana University Luneburg Department of Economics Scharnhorststr. 1 D-21335 Luneburg leibrecht@. University of Innsbruck Department of Economics Universitaetsstrasse 15 A-6020 Innsbruck Austria Phone 43 512 507 7357 e-mail corresponding author.

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