Score contribution per author:
α: calibrated so average coauthorship-adjusted count equals average raw count
We analyze the impact of imperfect competition in banking on fiscal policy in a dynamic model. In an exchange two-period economy the impact of deficit spending is to reduce private consumption and increase the spread between deposit and lending rates. The reason is that a tax cut forces consumers to save more and makes their supply of savings more rigid, which softens competition between banks leading to lower rates on deposits and a more than proportional increase in savings. In a closed production economy this reduces the equilibrium interest rate on borrowers, which promotes private investment.