Differential Crowding Out Effects of Government Loans and Bonds: Evidence from an Emerging Market Economy

Isha Agarwal, David Jaume, Everardo Tellez de la Vega and Martin Tobal
Additional contact information
Isha Agarwal: Sauder School of Business/University of British Columbia
Everardo Tellez de la Vega: Sauder School of Business/University of British Columbia

No 314, Working Papers from Red Nacional de Investigadores en Economía (RedNIE)

Abstract: We provide the first empirical evidence that the “type” of bank lending to the government affects the extent of crowding out in an Emerging Market and Developing Economy (EMDE). For this purpose, we build a new dataset combining proprietary information on all loans granted by commercial banks to non-financial private firms and the government in Mexico, along with data on government bonds held by these banks. By exploiting heterogeneity in firms’ exposure to different types of bank lending to the government within this unique dataset, we show for the first time that the size of crowding out of credit to small and medium-sized firms (SMEs) varies significantly across debt instruments. Specifically, we find that the crowding-out effect is around three times larger for bank loans than for bank holdings of government bonds. This reduced crowding-out effect of bonds is linked to banks’ ability to use them as collateral in the interbank market, which helps them raise secured funding and reduces the need to curtail credit supply to firms. Our findings underscore the importance of welldeveloped sovereign bond markets in mitigating the adverse effects of government borrowing on credit access for SMEs, particularly in EMDEs where credit markets are underdeveloped and these firms are more credit-constrained.

Keywords: Crowding Out; Firm Credit; Public Sector Financing (search for similar items in EconPapers)
JEL-codes: E44 G20 H63 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2024-04
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg and nep-ifn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:aoz:wpaper:314

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