The French Regions’ Borrowing Behaviours: How Heterogeneous are They?

Abstract

This paper provides empirical evidence of the heterogeneous borrowing behaviours of French regions, despite a common accountability constraint that forces them to balance their budget and to borrow only to finance investment expenditure (golden rule). To this end, we use a quantile regression analysis covering the period from 1999 to 2007. The heterogeneity is very pronounced when the regions face a negative shock on debt, for instance a tightening of financial conditions. We explain our findings as a consequence of the fact that the Golden rule can be thought of as a “soft” rule if some local administrations believe that a financial rescue from the central government is automatic (as the regions receive transfers from the later). In this case, some regions find it advantageous to consider borrowing as an adjustment variable when taking their budgetary decisions.