Borradores de Economía - Government Borrowing and Crowding Out

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.