Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation

Bernardo Morais, Jose-Luis Peydro and Claudia Ruiz-Ortega ()
Additional contact information
Bernardo Morais: https://www.federalreserve.gov/econres/bernardo-c-morais.htm
Claudia Ruiz-Ortega: https://www.worldbank.org/en/about/people/c/claudia-ruiz
Authors registered in the RePEc Author Service: Claudia Ruiz Ortega

No 1323, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We study the impact of public debt limits on economic growth exploiting the introduction of a Mexican law capping the debt of subnational governments. Despite larger fiscal consolidation, states with higher ex-ante public debt grew substantially faster after the law, albeit at the expense of increased extreme poverty. Credit registry data suggests that the mechanism behind this result is a reduction in crowding out. After the law, banks operating in more indebted states reallocate credit away from local governments and into private firms. The unwinding of crowding out is stronger for riskier firms, firms borrowing from banks more exposed to local public debt, and for firms operating in states with lower public spending on infrastructure projects.

Keywords: Crowding out; Government lending; Subnational debt; Banks; Emerging markets (search for similar items in EconPapers)
JEL-codes: D72 G21 L33 P16 (search for similar items in EconPapers)
Date: 2021-08-04
New Economics Papers: this item is included in nep-ban, nep-fdg and nep-isf
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.federalreserve.gov/econres/ifdp/files/ifdp1323.pdf (application/pdf)

Related works:
Working Paper: Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation (2021)
Working Paper: Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1323

DOI: 10.17016/IFDP.2021.1323

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().