Anno III - Numero 26
Riflettere è considerevolmente laborioso; ecco perché molta gente preferisce giudicare.
José Ortega y Gasset

giovedì 24 maggio 2018

Does Public Debt Crowd Out Corporate Investment?

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

di Yi Huang, Ugo Panizza e Richard Varghese

The global financial crisis was followed by a massive increase in public sector borrowing. Total outstanding public debt nearly doubled from $35 trillion in 2007 to $66 trillion in 2017. Over the same period, public debt increased from 71 to 105 percent of GDP in advanced economies and from 36 to 48 percent of GDP in emerging and developing economies (International Monetary Fund, 2017). This rapid increase in government debt sparked a large literature aimed at estimating the effect of public sector borrowing on economic activity. Following the influential contributions of Reinhart and Rogoff (2010), a large number of papers used countrylevel data to establish the presence of a negative correlation between government debt and each of economic growth and investment (e.g., Cecchetti, Mohanty and Zampolli, 2011, Checherita-Westphal and Rother, 2012, and Kumar and Woo, 2015), but also highlighted the presence of substantial cross-country heterogeneity (Eberhardt and Presbitero, 2015, and Kourtellos, Stengos, and Tan, 2013), and challenged the presence of debt thresholds (Chudik, Mohaddes, Pesaran, and Raissi, 2017). However, the cross-country literature has been less successful in establishing the presence of a causal link going from pubic debt to economic growth (Panizza and Presbitero, 2013 and Panizza and Presbitero, 2014). 

Reverse causality is a particularly important issue for the study of the link between debt and growth. Traditional Keynesian policies and neoclassical models of optimal fiscal policy (Barro, 1979) suggest that countries should run deficits, and hence accumulate debt, in bad times and surpluses in good times. If shocks to growth are persistent (Cerra and Saxena, 2008), the presence of a countercyclical fiscal policy can generate a long-run negative correlation between debt and growth, where it is low growth that causes high debt and not the other way around. In this paper, we focus on corporate investment and provide a direct test for the crowding out e§ect emphasized by the economic literature by showing that government debt reduces investment by tightening the credit constraints faced by private firms. Using data for nearly 550,000 firms in 69 countries over 1998-2014, we show that higher levels of government debt are associated with lower private investment and with an increase of the sensitivity of investment to internally generated funds. Our results are related to the findings of Greenwood, Hanson, and Stein (2010), Graham, Leary and Roberts (2015), and Demirci, Huang, and Sialm (2017) who describe the relationship between the structure and level of government debt and corporate leverage. While these authors focus on firms capital structure, we study the behavior of corporate investment and thus describe a channel through which public debt directly affects economic activity

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