Does Government Debt Crowd Out Corporate Investment? A Bank Lending Channel

Abstract

Bank loans are an important source of financing for governments, accounting for 19% of total public sector debt in EU countries. Using the French credit register over 2006-2018 and leveraging variation in public sector debt dynamics at the bank-location level, I show that increases in the demand for bank debt by public sector entities causally crowd out bank lending to private corporations. When public sector entities borrow an additional 1€ from the median bank, this bank lends 0.78€ less to the private sector, with sizeable effects on firm-level investment. My results suggest that crowding out effects may substantially reduce (local) fiscal multipliers.