The Credit Channel of Fiscal Policy Transmission

We propose and test a new channel through which fiscal policy changes affect the supply of intermediated credit and the real economy. Lenders that have greater exposure to firms expected to repatriate a significant amount of foreign income as a result of a 2004-2005 U.S. tax holiday subsequently increase lending to other, purely domestic firms during the tax holiday, leading to higher investment at these firms. Our results suggest that fiscal policy changes can affect otherwise unrelated firms through general equilibrium financial sector spillovers