Does Public Debt Crowd Out Corporate Investment? International Evidence

37 Pages Posted: 15 May 2018

See all articles by Yi Huang

Yi Huang

Graduate Institute of International and Development Studies

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics; CEPR

Richard Varghese

Graduate Institute of International and Development Studies (IHEID)

Date Written: May 2018

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: Credit Constraints., Crowding out, investment, public debt

JEL Classification: E22, E62, H63

Suggested Citation

Huang, Yi and Panizza, Ugo and Varghese, Richard, Does Public Debt Crowd Out Corporate Investment? International Evidence (May 2018). CEPR Discussion Paper No. DP12931, Available at SSRN: https://ssrn.com/abstract=3178102

Yi Huang (Contact Author)

Graduate Institute of International and Development Studies ( email )

PO Box 136
Geneva, CH-1211
Switzerland

Ugo Panizza

Graduate Institute of International and Development Studies (IHEID) - Department of Economics ( email )

Geneva Avenue de la Paix 11A
Geneva, 1202
Switzerland

CEPR ( email )

London
United Kingdom

Richard Varghese

Graduate Institute of International and Development Studies (IHEID) ( email )

PO Box 136
Geneva, CH-1211
Switzerland

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