Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation

83 Pages Posted: 11 Aug 2021

See all articles by Bernardo Morais

Bernardo Morais

Board of Governors of the Federal Reserve System

Javier Perez-Estrada

Bank of Mexico

José-Luis Peydró

Imperial College London; Centre for Economic Policy Research (CEPR); Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Claudia Ruiz Ortega

World Bank; World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

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

Suggested Citation

Morais, Bernardo and Perez-Estrada, Javier and Peydro, Jose-Luis and Ruiz Ortega, Claudia and Ruiz Ortega, Claudia, Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation (August 1, 2021). International Finance Discussion Paper No. 1323, Available at SSRN: https://ssrn.com/abstract=3902998 or http://dx.doi.org/10.17016/IFDP.2021.1323

Bernardo Morais (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
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Javier Perez-Estrada

Bank of Mexico ( email )

Av. 5 de Mayo 18
Piso 4
Mexico City, 06059
Mexico

Jose-Luis Peydro

Imperial College London ( email )

South Kensington Campus
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United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

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Barcelona, Barcelona 08005
Spain
(+34) 93 542 1756 (Phone)
(+34) 93 542 1746 (Fax)

HOME PAGE: http://https://sites.google.com/site/joseluispeydroswebpage/

Claudia Ruiz Ortega

World Bank ( email )

1818 H Street
Washington, DC 20433
United States

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, NW
Washington, DC 20433
United States

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