Working Paper: CEPR ID: DP16511
Authors: Jos Luis Peydr; Bernardo Morais; Claudia Ruiz Ortega; Javier Perezestrada
Abstract: We show expansionary fiscal austerity via reallocation of credit supply, but with a raise in poverty.For identification, we exploit the introduction of a Mexican law limiting the debt of subnationalgovernments along with matched credit register, firm, bank, and state datasets. After the law,states with higher ex ante public debt grow substantially faster, despite larger fiscal consolidation(higher taxes and lower public expenditure). Banks operating in more indebted states reallocatecredit supply away from local governments into private firms, with stronger effects for banks withhigher exposure to local public debt, consistent with lowering crowding out. Effects only happenafter the law, not before, and there are strong firm-level real effects associated. The reduction ofcrowding out is stronger for financially constrained firms and for firms operating in states withhigher ex ante public spending on social services over infrastructure projects. In states moreaffected by the law, despite better economic effects, extreme poverty increases--especially instates with higher ex ante public spending on social services over infrastructure--consistent witha strong reduction for social services during the fiscal consolidation.
Keywords: subnational government debt; banks; credit; crowding out; poverty
JEL Codes: D72; E62; G21; L33; P16
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| FD law (G28) | economic growth (O49) |
| FD law (G28) | extreme poverty rates (I32) |
| public debt (H63) | economic growth (O49) |
| public debt (H63) | extreme poverty rates (I32) |
| bank lending behavior (G21) | economic growth (O49) |
| bank lending behavior (G21) | extreme poverty rates (I32) |
| higher public spending on social services (P35) | economic activity (E20) |
| higher public spending on social services (P35) | extreme poverty (I32) |
| banks with higher exposure to local public debt (F65) | lending to local governments (H74) |
| banks with higher exposure to local public debt (F65) | lending to private firms (G21) |