IDEAS home Printed from https://ideas.repec.org/p/zbw/bofrdp/92022.html
   My bibliography  Save this paper

Growing like Germany: Local public debt, local banks, low private investment

Author

Listed:
  • Hoffmann, Mathias
  • Stewen, Iryna
  • Stiefel, Michael

Abstract

Over 2010-2016, municipal debt in Germany crowded out private investment worth 1 percent of GDP. Forced to lend to municipalities by their statutes, local public banks compensated for declining municipal-debt yields by charging higher rates to firms in Germany's locally segmented credit markets. The ensuing crowding-out was made worse by increased municipal borrowing when expensive fiscal commitments were shifted from federal and state to the municipal levels following the introduction of the debt brake. Our results identify new channels through which low interest rates adversely affect real outcomes and locally segmented credit markets can amplify contractionary effects from fiscal austerity.

Suggested Citation

  • Hoffmann, Mathias & Stewen, Iryna & Stiefel, Michael, 2022. "Growing like Germany: Local public debt, local banks, low private investment," Bank of Finland Research Discussion Papers 9/2022, Bank of Finland.
    • Handle: RePEc:zbw:bofrdp:92022
    as

    Download full text from publisher

    File URL: https://www.econstor.eu/bitstream/10419/263989/1/181525159X.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Degryse, H.A. & Ongena, S., 2002. "Distance, Lending Relationships and Competition," Other publications TiSEM 122f97cc-f8b2-4b3b-9351-9, Tilburg University, School of Economics and Management.
    2. Chen, Peter & Karabarbounis, Loukas & Neiman, Brent, 2017. "The global rise of corporate saving," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 1-19.
    3. Sharpe, Steven A, 1990. "Asymmetric Information, Bank Lending, and Implicit Contracts: A Stylized Model of Customer Relationships," Journal of Finance, American Finance Association, vol. 45(4), pages 1069-1087, September.
    4. Sanderson, Eleanor & Windmeijer, Frank, 2016. "A weak instrument F-test in linear IV models with multiple endogenous variables," Journal of Econometrics, Elsevier, vol. 190(2), pages 212-221.
    5. Florian Englmaier & Till Stowasser, 2017. "Electoral Cycles in Savings Bank Lending," Journal of the European Economic Association, European Economic Association, vol. 15(2), pages 296-354.
    6. Kilian Huber, 2015. "The Persistence of a Banking Crisis," Discussion Papers 1532, Centre for Macroeconomics (CFM).
    7. Guillaume Gilquin, 2014. "Der deutsche Bankensektor," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 94(6), pages 420-427, June.
    8. Thiemo Fetzer, 2019. "Did Austerity Cause Brexit?," American Economic Review, American Economic Association, vol. 109(11), pages 3849-3886, November.
    9. Florian Englmaier & Till Stowasser, 2017. "Electoral Cycles in Savings Bank Lending," Journal of the European Economic Association, European Economic Association, vol. 15(2), pages 296-354.
    10. Florian Heider & Farzad Saidi & Glenn Schepens, 2019. "Life below Zero: Bank Lending under Negative Policy Rates," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3728-3761.
    11. Christoph Basten & Mike Mariathasan, 2018. "How Banks Respond to Negative Interest Rates: Evidence from the Swiss Exemption Threshold," CESifo Working Paper Series 6901, CESifo.
    12. Hans Degryse & Nancy Masschelein & Janet Mitchell, 2004. "SMEs and Bank Lending Relationships: the Impact of Mergers," Working Paper Research 46, National Bank of Belgium.
    13. Zheng Song & Kjetil Storesletten & Fabrizio Zilibotti, 2011. "Growing Like China," American Economic Review, American Economic Association, vol. 101(1), pages 196-233, February.
    14. repec:ces:ifofor:v::y:2017:i::p:21-24 is not listed on IDEAS
    15. Yi Huang & Marco Pagano & Ugo Panizza, 2020. "Local Crowding‐Out in China," Journal of Finance, American Finance Association, vol. 75(6), pages 2855-2898, December.
    16. Mai Dao & Chiara Maggi, 2018. "The Rise in Corporate Saving and Cash Holding in Advanced Economies: Aggregate and Firm Level Trends," IMF Working Papers 2018/262, International Monetary Fund.
    17. Michael Koetter & Alexander Popov, 2021. "Political Cycles in Bank Lending to the Government," The Review of Financial Studies, Society for Financial Studies, vol. 34(6), pages 3138-3180.
    18. Xavier Gabaix & Ralph S. J. Koijen, 2024. "Granular Instrumental Variables," Journal of Political Economy, University of Chicago Press, vol. 132(7), pages 2274-2303.
    19. Koetter, Michael & Popov, Alexander, 2018. "Politics, banks, and sub-sovereign debt: unholy trinity or divine coincidence?," Working Paper Series 2146, European Central Bank.
    20. Asim Ijaz Khwaja & Atif Mian, 2008. "Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market," American Economic Review, American Economic Association, vol. 98(4), pages 1413-1442, September.
    21. Simon Gilchrist & Egon Zakrajsek, 2007. "Investment and the Cost of Capital: New Evidence from the Corporate Bond Market," NBER Working Papers 13174, National Bureau of Economic Research, Inc.
    22. Joseph Abadi & Markus Brunnermeier & Yann Koby, 2023. "The Reversal Interest Rate," American Economic Review, American Economic Association, vol. 113(8), pages 2084-2120, August.
    23. Hans Degryse & Steven Ongena, 2005. "Distance, Lending Relationships, and Competition," Journal of Finance, American Finance Association, vol. 60(1), pages 231-266, February.
    24. Emi Nakamura & J?n Steinsson, 2014. "Fiscal Stimulus in a Monetary Union: Evidence from US Regions," American Economic Review, American Economic Association, vol. 104(3), pages 753-792, March.
    25. Manuel Adelino & Igor Cunha & Miguel A. Ferreira, 2017. "The Economic Effects of Public Financing: Evidence from Municipal Bond Ratings Recalibration," The Review of Financial Studies, Society for Financial Studies, vol. 30(9), pages 3223-3268.
    26. Popov, Alexander & Rocholl, Jörg, 2018. "Do credit shocks affect labor demand? Evidence for employment and wages during the financial crisis," Journal of Financial Intermediation, Elsevier, vol. 36(C), pages 16-27.
    27. Kilian Huber, 2018. "Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties," American Economic Review, American Economic Association, vol. 108(3), pages 868-898, March.
    28. Degryse, H.A. & Ongena, S., 2003. "Distance, Lending Relationships, and Competition," Other publications TiSEM eb89e625-09a5-4385-b973-f, Tilburg University, School of Economics and Management.
    29. Clemens Fuest & Klaus Gründler & Niklas Potrafke & Marcel Fratzscher & Alexander Kriwoluzky & Claus Michelsen & Michael Hüther & Peter Bofinger & Lars P. Feld & Wolf Heinrich Reuter, 2019. "Schuldenbremse — Investitionshemmnis oder Vorbild für Europa? [Debt Brake — Investment Barrier or Role Model for Europe?]," Wirtschaftsdienst, Springer;ZBW - Leibniz Information Centre for Economics, vol. 99(5), pages 307-329, May.
    30. Christa Hainz & Artem Marjenko & Susanne Wildgruber, 2017. "How the ECB’s Low-Interest Policy Impacts Firms: Results of the ifo Business Survey on them Effects of Negative Interest Rates for Bank Deposits," CESifo Forum, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 18(03), pages 21-24, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ivanov, Ivan T. & Zimmermann, Tom, 2024. "The “Privatization” of municipal debt," Journal of Public Economics, Elsevier, vol. 237(C).
    2. Peydró, José-Luis & Morais, Bernardo & Ruiz-Ortega, Claudia & Perez-Estrada, Javier, 2021. "Expansionary Austerity: Reallocating Credit Amid Fiscal Consolidation," CEPR Discussion Papers 16511, C.E.P.R. Discussion Papers.
    3. Asatryan, Zareh & Heinemann, Friedrich & Nover, Justus, 2022. "The other government: State-owned enterprises in Germany and their implications for the core public sector," ZEW Expert Briefs 22-08, ZEW - Leibniz Centre for European Economic Research.
    4. Xiaoming Li & Zheng Liu & Yuchao Peng & Zhiwei Xu, 2024. "The Crowding-In Effects of Local Government Debt in China," Working Paper Series 2024-35, Federal Reserve Bank of San Francisco.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kilian Huber, 2015. "The Persistence of a Banking Crisis," Discussion Papers 1532, Centre for Macroeconomics (CFM).
    2. Kilian Huber, 2021. "Are Bigger Banks Better? Firm-Level Evidence from Germany," Journal of Political Economy, University of Chicago Press, vol. 129(7), pages 2023-2066.
    3. Huber, Kilian Maria, 2020. "Are bigger banks better? Firm-level evidence from Germany," LSE Research Online Documents on Economics 121861, London School of Economics and Political Science, LSE Library.
    4. Koetter, Michael & Noth, Felix & Rehbein, Oliver, 2020. "Borrowers under water! Rare disasters, regional banks, and recovery lending," Journal of Financial Intermediation, Elsevier, vol. 43(C).
    5. Théo Nicolas., 2023. "Bank Market Power and Interest Rate Setting: Why Consolidated Banking Data Matte [Pouvoir de marché des banques et fixation des taux d’intérêt : de l’importance de prendre en compte les données ban," Débats économiques et financiers 40, Banque de France.
    6. Anne Duquerroy & Clément Mazet-Sonilhac & Jean-Stéphane Mésonnier & Daniel Paravisini, 2022. "Bank Local Specialization," SciencePo Working papers Main hal-03812807, HAL.
    7. Olivier De Jonghe & Hans Dewachter & Klaas Mulier & Steven Ongena & Glenn Schepens, 2020. "Some Borrowers Are More Equal than Others: Bank Funding Shocks and Credit Reallocation [A theory of systemic risk and design of prudential bank regulation]," Review of Finance, European Finance Association, vol. 24(1), pages 1-43.
    8. Krusell, Per & Rudanko, Leena, 2016. "Unions in a frictional labor market," Journal of Monetary Economics, Elsevier, vol. 80(C), pages 35-50.
    9. Carlo Altavilla & Miguel Boucinha & Sarah Holton & Steven Ongena, 2021. "Credit Supply and Demand in Unconventional Times," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(8), pages 2071-2098, December.
    10. Basten, Christoph & Ongena, Steven, 2024. "Mortgage lending through a fintech web platform. The roles of competition, diversification, and automation," Journal of Banking & Finance, Elsevier, vol. 163(C).
    11. Oliver Rehbein & Simon Rother, 2020. "The Role of Social Networks in Bank Lending," ECONtribute Discussion Papers Series 033, University of Bonn and University of Cologne, Germany.
    12. Nakashima, Kiyotaka & Takahashi, Koji, 2020. "The time has come for banks to say goodbye: New evidence on bank roles and duration effects in relationship terminations," Journal of Banking & Finance, Elsevier, vol. 115(C).
    13. Berg, Tobias & Haselmann, Rainer & Kick, Thomas & Schreiber, Sebastian, 2023. "Unintended consequences of QE: Real estate prices and financial stability," IMFS Working Paper Series 196, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    14. José Renato Haas Ornelas & Alvaro Pedraza & Claudia Ruiz-Ortega & Thiago Christiano Silva, 2021. "Credit Allocation When Private Banks Distribute Government Loans," Working Papers Series 548, Central Bank of Brazil, Research Department.
    15. Cornelia Kerl & Friederike Niepmann, 2014. "What determines the composition of international bank flows?," Staff Reports 681, Federal Reserve Bank of New York.
    16. Albertazzi, Ugo & Barbiero, Francesca & Marqués-Ibáñez, David & Popov, Alexander & Rodriguez d’Acri, Costanza & Vlassopoulos, Thomas, 2020. "Monetary policy and bank stability: the analytical toolbox reviewed," Working Paper Series 2377, European Central Bank.
    17. Moser, Christian & Saidi, Farzad & Wirth, Benjamin & Wolter, Stefanie, 2020. "Credit Supply, Firms, and Earnings Inequality," MPRA Paper 100371, University Library of Munich, Germany.
    18. Guler, Ozan & Mariathasan, Mike & Mulier, Klaas & Okatan, Nejat G., 2019. "The Real Effects of Credit Supply: Review, Synthesis, and Future Directions," MPRA Paper 96542, University Library of Munich, Germany.
    19. Barth, James R. & Hu, Qinyou & Sickles, Robin & Sun, Yanfei & Yu, Xiaoyu, 2024. "Direct and indirect impacts of natural disasters on banks: A spatial framework," Journal of Financial Stability, Elsevier, vol. 70(C).
    20. Hoffmann, Mathias & Maslov, Egor & Sørensen, Bent E., 2022. "Small firms and domestic bank dependence in Europe's great recession," Journal of International Economics, Elsevier, vol. 137(C).

    More about this item

    Keywords

    local public finance; firm-level investment; crowding-out; fiscal austerity; global and intraEuropean imbalances;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:zbw:bofrdp:92022. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ZBW - Leibniz Information Centre for Economics (email available below). General contact details of provider: https://edirc.repec.org/data/bofgvfi.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.