Effect of a Transfer Shock on Subnational Debt: Micro Evidence from Mexico

93 Pages Posted: 1 Jun 2021 Last revised: 26 Oct 2023

See all articles by Mariela Dal Borgo

Mariela Dal Borgo

Bank of Mexico, Financial Stability Directorate

Date Written: October 24, 2023

Abstract

This paper examines how a shock to the distribution of federal transfers to Mexican municipalities affects their demand for long-term loans. Transfers are the main source of revenue for local governments, which have limited credit access on average. Using novel supervisory data, I find a positive shock effect on municipalities' share in total municipal loans but no effect on take-up, repayment, or volume at the intensive margin. Transfers increase loan take-up from private lenders but not from the development bank. Take-up by governments with some other debt ex ante is more sensitive to the shock, and the more financially vulnerable resort to private lenders. These findings imply that a rise in transfers does not ease credit access to unbanked governments, on average, but increases long-term financing options for those with preexisting debt. The additional revenue mostly finances current expenditures, given limited local investment capacities.

Keywords: municipal loans, bank lending, federal transfers, loan collateral, development bank

JEL Classification: G21, H72, H74, H77, O16

Suggested Citation

Dal Borgo, Mariela, Effect of a Transfer Shock on Subnational Debt: Micro Evidence from Mexico (October 24, 2023). Available at SSRN: https://ssrn.com/abstract=3855846 or http://dx.doi.org/10.2139/ssrn.3855846

Mariela Dal Borgo (Contact Author)

Bank of Mexico, Financial Stability Directorate ( email )

Av. 5 de Mayo 2
Mexico City, 06059
Mexico

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