Bonfim, DianaFerreira, Miguel A.Queiró, FranciscoSujiao (Emma), Zhao2022-08-302022-08-302021-06-15Bonfim, Diana, Ferreira, Miguel A., Queiró, Francisco, Zhao, Sunjiao. Fiscal Policy and Credit Supply: The Procurement Channel. (November 2022) Nova SBE Working Paper Series No. 644http://hdl.handle.net/10362/143356We measure how cuts to public procurement propagate through the banking system in a financial crisis. During the European sovereign debt crisis, the Portuguese government cut procurement spending by 4.3% of GDP.We find that this cut saddled banks with non-performing loans from government contractors, which led to a reduction in credit supply to other firms. The credit supply shock, in turn, caused firm output to decline. In a general equilibrium model, our firm-level estimates imply an aggregate elasticity of credit supply with respect to aggregate demand of 1.6 and a credit-driven fiscal multiplier of 0.6.engCredit supplyGovernment procurementInvestmentEmploymentFinancial crisisBank-sovereign loopAusterityworking paper