The Crowding Out Effect of Local Government Debt: Micro- and Macro-Estimates

Noémie Pinardon Touati (HEC - Paris)

January 28, 2022, 14:00–15:30


Room online

Job Market Seminar


Local government expenditures are increasingly financed by debt, mostly consisting of bank loans. I study the crowding out effect of these loans on corporate credit, investment, employment, and output, using French administrative data over 2006-2018. Exploiting plausibly exogenous variation in local government credit growth across banks, I show that when a local government borrows an additional AC1 from a bank, this bank reduces corporate credit by AC0.5, with significant effects on firm-level investment. Combining these reduced-form effects and a model, I show that crowding out reduces the output multiplier of debt-financed local government spending by 0.3. This is large compared to government spending multiplier estimates. Crowding out is driven by banks’ limited ability to expand their credit supply. These results show that constraints on financing supply reduce the stimulus effect of debt-financed government spending.