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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
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Working Paper: Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation (2021) Downloads
Working Paper: Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1323

DOI: 10.17016/IFDP.2021.1323

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