Working Paper: CEPR ID: DP12931
Authors: Ugo Panizza; Yi Huang; Richard Varghese
Abstract: Using data for advanced and emerging economies, we show that there is a negative correlation between public debt and corporate investment. Industry-level regressions show that high levels of government debt are particularly damaging for industries that need more external financial resources. Firm-level regressions show that government debt increases the sensitivity of corporate investment to cash flow. These results indicate that the relationship between public debt and investment is likely to be causal and that public debt crowds out corporate investment by tightening credit constraints.
Keywords: Investment; Public Debt; Crowding Out; Credit Constraints
JEL Codes: E22; E62; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| public debt (H63) | corporate investment (G31) |
| public debt (H63) | sensitivity of corporate investment to cash flow (G31) |
| sensitivity of corporate investment to cash flow (G31) | corporate investment (G31) |
| public debt (H63) | credit constraints (E51) |
| credit constraints (E51) | corporate investment (G31) |
| public debt (H63) | corporate investment (in industries reliant on external financing) (G31) |
| public debt (H63) | corporate investment (for unlisted, smaller, and younger firms) (G30) |