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Does Public Debt Crowd Out Corporate Investment? International Evidence

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Abstract

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.

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  • Yi Huang & Ugo Panizza & Richard Varghese, 2018. "Does Public Debt Crowd Out Corporate Investment? International Evidence," IHEID Working Papers 08-2018, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp08-2018
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    More about this item

    Keywords

    Investment; Public Debt; Crowding Out; Credit Constraints;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt

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