Expansionary Austerity : Reallocating Credit Amid Fiscal Consolidation
This paper shows expansionary fiscal austerity via reallocation of credit supply, but with a raise in poverty. For identification, the paper exploits the introduction of a Mexican law limiting the debt of subnational governments along with matched credit register, firm, bank, and state datasets...
| Main Authors: | , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/147941620675969963/Expansionary-Austerity-Reallocating-Credit-Amid-Fiscal-Consolidation http://hdl.handle.net/10986/35568 |
| Summary: | This paper shows expansionary fiscal austerity via reallocation
of credit supply, but with a raise in poverty. For
identification, the paper exploits the introduction of a
Mexican law limiting the debt of subnational governments
along with matched credit register, firm, bank, and state
datasets. After the law, states with higher ex ante public debt
grow substantially faster, despite larger fiscal consolidation
(higher taxes and lower public expenditure). Banks operating
in more indebted states reallocate credit supply away
from local governments into private firms, with stronger
effects for banks with higher exposure to local public debt,
consistent with lowering crowding out. Effects only happen
after the law, not before, and there are strong firm-level real
effects associated. The reduction of crowding out is stronger
for financially constrained firms and for firms operating in
states with higher ex ante public spending on social services
over infrastructure projects. In states more affected
by the law, despite better economic effects, extreme poverty
increases––especially in states with higher ex ante public
spending on social services over infrastructure––consistent
with a strong reduction for social services during the fiscal
consolidation. |
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