Working Paper: NBER ID: w29882
Authors: Joshua Aizenman; Yothin Jinjarak; Mark M. Spiegel
Abstract: We investigate the implications of government indebtedness for the efficacy of expansionary government spending in encouraging commercial bank lending growth during the COVID-19 pandemic. Our sample is a large cross-section of over 3000 banks from 71 countries. To address the likely endogeneity of government assistance, we instrument for extra-normal spending using disparities in pre-existing national political characteristics. Our results indicate that bank lending did respond to fiscal capacity, as higher public debt going into the crisis weakened the expansionary effects of higher spending on bank lending at economically and statistically significant levels. Moreover, this sensitivity was higher among weaker banks, suggesting sensitivity to the perceived implications of spending for government assistance going forward. We also found greater sensitivity in high-income economies and for small and medium-sized banks. Our results are robust to a variety of robustness tests, including perturbations in specification, sample, and estimation methodology.
Keywords: COVID-19; Fiscal Capacity; Bank Lending; Government Spending
JEL Codes: E62; F34; G21; H30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Higher public debt levels (H69) | Weakened expansionary effects of government spending on bank lending (E62) |
| Increased government spending (H59) | Increased commercial bank lending (G21) |
| Higher public debt levels (H69) | Negative impact on the relationship between government spending and bank lending (F65) |
| Government spending (H59) | Bank lending growth sensitivity (G21) |
| Bank lending growth (G21) | Fiscal capacity's role in effectiveness of expansionary fiscal policies (E62) |