Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation
83 Pages Posted: 11 Aug 2021
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Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation
Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation
Date Written: August 1, 2021
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.
JEL Classification: D72, G21, L33, P16
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