Government Borrowing and Crowding Out

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The series Working Papers on Economics is published by the Office for Economic Studies at the Banco de la República (Central Bank of Colombia). The works published are provisional, and their authors are fully responsible for the opinions expressed in them, as well as for possible mistakes. The opinions expressed herein are those of the authors and do not necessarily reflect the views of Banco de la República or its Board of Directors.

AUTHOR OR EDITOR
Onder, Yasin Kursat
Restrepo-Tamayo, Sara
Ruiz-Sanchez, Maria Alejandra
Villamizar-Villegas, Mauricio

The series Borradores de Economía (Working Papers on Economics) contributes to the dissemination and promotion of the work by researchers from the institution. On multiple occasions, these works have been the result of collaborative work with individuals from other national or international institutions. This series is indexed at Research Papers in Economics (RePEc). The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Publication Date:
Thursday, 02 December 2021

Abstract

We investigate the impact of fiscal expansions on firm investment by exploiting firms that have multiple banking relationships. Further, we conduct a localized RDD approach and compare the lending behavior of banks that barely met and missed the criteria of being a primary dealer, as well as  barely winners and losers at government auctions. Our results indicate that a 1 percentage point increase in banks’ bonds-to-assets ratio decreases loans by up to 0.4%, which leads to significant declines in firm investment, profits and wages. Our findings are grounded in a quantitative model with financial and real sectors with which we undertake a welfare analysis and compute the cost of government borrowing on the overall economy.