Growing Like Germany: Local Public Debt, Local Banks, Low Private Investment

Using a firm-bank panel of more than 1m German firms over 2010-2016, we document that local public bank lending to municipalities crowds out private investment. Our results show how crowding-out can happen in developed economy characterized by low interest rates and fiscal austerity. mechanism relies on two structural features Germany’s banking landscape: First, the geographical segmentation credit markets for small medium (SME) which are dominated banks. Secondly, special statutory mandate requiring banks lend municipalities. With yields government debt declining all-time lows, tried alleviate stress their balance sheets using market power charge higher SME customers. This crowded firm Perversely, consolidation at state federal levels contributed this effect putting pressure budgets municipal governments increasingly borrowed from Crowding-out lowered aggregate investment around 30-40 bio euros per year (or 1 percent GDP). Thus, identify novel channel through adversely affect performance. also illustrate segmented amplify negative multiplier effects