Debt and Private Investment: Does the EU Suffer from a Debt Overhang?

Open Economies Review - Tập 32 - Trang 789-820 - 2021
Willem Vanlaer1, Mattia Picarelli2, Wim Marneffe1
1Hasselt University, Faculty of Applied Economics, Hasselt, Belgium
2European Stability Mechanism, Luxembourg City, Luxembourg

Tóm tắt

This paper exploits a panel of 28 European Union (EU) countries between 1995 and 2016 to analyze whether higher debt resulted in lower private investment – the so called debt overhang effect. We deal with the potential endogeneity between private investment and other macroeconomic determinants by applying an instrumental variable approach (GMM). Our results support the debt overhang hypothesis and indicate that this relationship only works through the public debt channel. In our baseline regression, a 10 percentage point increase in public debt reduced private investment by €18.32 billion, given the levels of private investment prevalent in 2016. By contrast, private debt does not appear to be a significant determinant of private investment. These results hold after controlling for a number of factors that might have caused public debt to increase and private investment to decrease. While our analysis focuses on the financial sector channel, we find no evidence that public debt tightens the credit constraints for private firms or worsens the public debt overhang. We also show that government bailouts of the financial sector, which could alleviate financial distress and boost credit provision, do not appear to be effective in mitigating the public debt overhang effect. Finally, we find evidence that the financial openness of a country does alleviate the negative impact of public debt on private investment. This might suggest that attracting foreign capital compensates for a contraction in the domestic pool of financial resources due to higher public debt levels.

Tài liệu tham khảo

Abel AB (1983) Optimal investment under uncertainty. Am Econ Rev 73(1):228–233 Acharya VV, Drechsler I, Schnabl P (2012) A tale of two overhangs: the nexus of financial sector and sovereign credit risks. FSR Financial 51 Acharya VV, Drechsler I, Schnabl P (2014) A pyrrhic victory? Bank bailouts and sovereign credit risk. J Financ 69(6):2689–2739 Acharya VV, Shin HS, Yorulmazer T (2011) Crisis resolution and Bank liquidity. Rev Financ Stud 24(6):2166–2205 Ahlborn M, Schweickert R (2018) Public debt and economic growth – economic systems matter. IEEP 15(2):373–403 Aiyar S, Bergthaler W, Garrido JM, Ilyina A, Kang K, Kovtun D, Moretti M (2017) A strategy for resolving Europe’s problem loans. Eur Econ 1:87–95 Aivazian VA, Ge Y, & Qiu J (2005) The impact of leverage on firm investment: Canadian evidence. J Corp Finance 11(1-2):277–291 Albertazzi, U, Fringuellotti, F, Ongena, S (2019) Fixed rate versus adjustable rate mortgages: Evidence from euro area banks. ECB Working Paper No. 2322 Andrijevic M, Schleussner CF, Gidden MJ, McCollum DL, Rogelj J (2020) COVID-19 recovery funds dwarf clean energy investment needs. Science 370(6514):298–300 Apergis N (2000) Public and private investments in Greece: complementary or substitute ‘goods’? Bull Econ Res 52(3):225–234 Arellano M & Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297 Arslanalp S, Poghosyan T (2016) Foreign investor flows and sovereign bond yields in advanced economies. J Banking Financial Econ 2(6):45–67 Banerjee R, Hofmann B (2018) The rise of zombie firms: causes and consequences. BIS Quarterly Review September Bansal R, Yaron A (2004) Risks for the long run: a potential resolution of asset pricing puzzles. J Financ 59(4):1481–1509 Barro RJ (1996) Reflections on Ricardian equivalence. NBER Working Paper No. w5502 Benjamin J, Chinloy P, Jud D (2004) Why do households concentrate their wealth in housing? J Real Estate Res 26(4):329–344 Bernanke BS (1983) Irreversibility, uncertainty, and cyclical investment. Q J Econ 98(1):85–106 Bhattacharya S, Nyborg KG (2013) Bank Bailout Menus. Rev Corporate Finance Stud 2(1):29–61 Bloom N (2014) Fluctuations in uncertainty. J Econ Perspect 28(2):153–176 Bricongne J, Coutinho L, Turrini A, Zeugner S (2020) Is private debt excessive? Open Econ Rev 31:471–512 Bricongne J-C, Mordonu A (2017) Interlinkages between household and corporate debt in advanced economies. Open Econ Rev 28:1029–1055 Broner F, Erce A, Martin A, Ventura J (2014) Sovereign debt markets in turbulent times: creditor discrimination and crowding-out effects. J Monet Econ 61(C):114–142 Brown M, Lane P (2011) Debt overhang in emerging Europe? The World Bank Policy Research Paper No. 5784 Bussiere, M, Ferrara, L, Milovich, J (2015) Explaining the recent slump in investment: the role of expected demand and uncertainty. Banque de France Working Paper No. 571 Bussiere M, Fratzscher M (2008) Financial openness and growth: short-run gain, long-run pain? Rev Int Econ 16(1):69–95 Cecchetti, S G, Mohanty, M S, Zampolli, F (2011) The Real Effects of Debt. BIS Working Paper No. 352 Checherita-Westphal C, Rother P (2012) The impact of high government debt on economic growth and its channels: an empirical investigation for the euro area. Eur Econ Rev 56(7):1392–1405 Chhibber A, Van Wijnbergen S, Mundial B (1988) Public policy and private investment in Turkey. The World Bank Working Paper 120 Chinn MD, Ito H (2006) What matters for financial development? Capital controls, institutions, and interactions. J Dev Econ 81(1):163–192 Chudik A, Mohaddes K, Pesaran MH, Raissi M (2017) Is there a debt-threshold effect on output growth? Rev Econ Stat 99(1):135–150 Cordella T, Ricci LA, Ruiz-Arranz M (2004) Debt overhang or debt irrelevance? Revisiting the debt-growth link. IMF Working Paper 05/223 Cottarelli, M C, Fedelino, M A (2010) Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding. IMF Working Paper 10/155 De Bruyckere V, Gerhardt M, Schepens G, Vennet RV (2013) Bank/sovereign risk spillovers in the European debt crisis. J Bank Financ 37(12):4793–4809 De Santis RA, Geis A, Juskaite A, Cruz LV (2018) The impact of the corporate sector purchase programme on corporate bond markets and the financing of euro area non-financial corporations. Econ Bull 3 Demmou, L, Franco, G, Calligaris, S, Dlugosch, D (2021) Liquidity shortfalls during the COVID-19 outbreak: assessment and policy responses, OECD Economics Department Working Papers No. 1647 Dynan K, Mian A, Pence KM (2012) Is a household debt overhang holding back consumption? Comments and discussion. Brookings Papers on Economic Activity 299 Ejsing J, Lemke W (2011) The Janus-headed salvation: sovereign and bank credit risk premia during 2008–2009. Econ Lett 110(1):28–31 Erce A (2019) Bank and sovereign risk pass-through: Evidence from the euro area. Int Finance 23(1):64–84 Erden L, Holcombe RG (2005) The effects of public investment on private investment in developing economies. Public Finance Rev 33(5):575–602 Estrada, G B, Park, D, Ramayandi, A (2015) Financial development, financial openness, and economic growth. Asian Development Bank Economics Working Paper Series 442 European Investment Bank (EIB) (2013) Investment and investment finance in Europe, p 2013 Fatás A, Ghosh A, Panizza U, Presbitero AF (2019) The motives to borrow. CEPR Discussion Paper No. 13735 Fatás A, Mihov I (2001) Government size and automatic stabilizers: international and intranational evidence. J Int Econ 55(1):3–28 Fredriksson O, Frykström N (2019) “Bad loans” and their effects on banks and financial stability, Economic Commentary Sveriges Riksbank Gaballo G, Zetlin-Jones A (2016) Bailouts, moral hazard and banks’ home bias for sovereign debt. J Monet Econ 81:70–85 Gali J (1994) Government size and macroeconomic stability. Eur Econ Rev 38(1):117–132 Gebauer S, Setzer R, Westphal A (2018) Corporate debt and investment: a firm level analysis for stressed euro area countries. J Int Money Financ 86:112–130 Ghosh AR, Kim JI, Qureshi MS (2020) What’s in a name? That which we call capital controls. Econ Policy 35(101):147–208 Giannetti M, Simonov A (2013) On the real effects of bank bailouts: micro evidence from Japan. Am Econ J Macroecon 5(1):135–167 Gibson H, Hall S, Tavlas G (2017) Self-fulfilling dynamics: the interactions of sovereign spreads, sovereign ratings and bank ratings during the euro financial crisis. J Int Money Financ 73(B):371–385 Goretti, M, Souto, M (2013) Macro-financial implications of corporate (de-)leveraging in the euro area periphery. IMF Working Paper 13/154 Gorton G, Huang L (2004) Liquidity, efficiency, and Bank bailouts. Am Econ Rev 94(3):455–483 Hadjimichael MT, Nowak M, Sharer RL, Tahari A (1996) Adjustment for growth: the African experience. IMF Occasional Paper 143 Hambur J, La Cava G (2018) Do interest rates affect business investment? Evidence from Australian company-level data. Reserve Bank of Australia Research Discussion Paper RDP 2018-05 Hartman R (1972) The effects of Price and cost uncertainty on investment. J Econ Theory 5(2):258–266 Huang Y, Pagano M, Panizza U (2016) Public debt and private firm funding: evidence from Chinese cities CEPR Discussion papers no 11489 Huang Y, Panizza U, Varghese R (2018) Does public debt crowd out corporate investment? International evidence CEPR Discussion papers no. 12931 Intartaglia M, Antoniades A, Bhattacharyya S (2017) Unbundled debt and economic growth in developed and developing economies: an empirical analysis. World Econ 41(12):3345–3358 Jäger, A (2003) Corporate balance sheet restructuring and investment in the euro area. IMF Working Paper 03/117 Jansen K (1995) The macroeconomic effects of direct foreign investment: the case of Thailand. World Dev 23(2):193–210 Kalemli-Ozcan S, Laeven L, Moreno D (2019) Debt overhang, rollover risk and investment in Europe. ECB Working Paper No. 2241 Khan MS, Reinhart CM (1990) Private investment and economic growth in developing countries. World Dev 18(1):19–27 Kim DH, Lin SC, Suen YB (2013) Investment, trade openness and foreign direct investment: social capability matters. Int Rev Econ Financ 26:56–69 Kim T, Nguyen QH (2020) The effect of public spending on private investment. Rev Finance 24(2):415–451 Kose MA, Prasad ES, Terrones ME (2009) Does openness to international financial flows raise productivity growth? J Int Money Financ 28(4):554–580 Krugman P, Mankiw NG (1994) Peddling prosperity: economic sense and nonsense in the age of diminishing expectations. J Econ Lit 33(4):1987–1988 Laopodis NT (2001) Effects of government spending on private investment. Appl Econ 33(12):1563–1577 Lawless M, O’Connell B, O’Toole C (2015) SME recovery following a financial crisis: does debt overhang matter? J Financ Stab 19:45–59 Lee J, Rabanal P (2010) Forecasting U.S. investment. IMF Working Paper 10/246 Lewis, C, Pain N, Strasky J, Menkyna F (2014) Investment Gaps after the Crisis, OECD Economics Department Working Papers No. 1168 Li F, Mercatanti A, Mäkinen T, Silvestrini A (2019) A regression discontinuity design for categorical ordered running variables with an application to central bank purchases of corporate bonds. Bank of Italy Temi di Discussione (working paper) No. 1213 Liargovas PG, Skandalis KS (2012) Foreign direct investment and trade openness: the case of developing economies. Soc Indic Res 106(2):323–331 Lipsey RE (2004) Home-and host-country effects of foreign direct investment. In: Baldwin RE, Winters A (eds) Challenges to globalization: analyzing the economics. University of Chicago Press, pp 333–382 Liu Z, Lyu J (2021) Public debt and economic growth: threshold effect and its influence factors. Appl Econ Lett 28(3):208–212 Lo Duca, M, Koban, A, Basten, M, Bengtsson, E, Klaus, B, Kusmierczyk, P, Lang, J H, Detken, C, Peltonen, T (2017) A new database for financial crises in European countries. ESRB Occasional Paper Series 194 Lucas RE (1990) Why doesn’t capital flow from rich to poor countries? Am Econ Rev 80(2):92–96 Maki DM (2002) The growth of consumer credit and the household debt service burden. In: Durkin TA, Staten ME (eds) The impact of public policy on consumer credit. Springer, Boston, pp 43–68 Malmendier U, Tate G (2005) CEO overconfidence and corporate investment. J Financ 60(6):2661–2700 Merton RC (1974) On the pricing of corporate debt: the risk structure of interest rates. J Financ 29(2):449–470 Mian A, Sufi A (2015) House of debt: how they (and you) caused the great recession, and how we can prevent it from happening again. University of Chicago Press Myers SC (1977) Determinants of corporate borrowing. J Financ Econ 5:147–175 Nickell SJ (1981) Biases in dynamic models with fixed effects. Econometrica 49(6):1417–1426 Nier E, Sedik TS, Mondino T (2014) Gross private capital flows to emerging markets: can the global financial cycle be tamed? IMF Working Paper 14/196 Noorzoy MS (1980) Flows of direct investment and their effects on US domestic investment. Econ Lett 5(4):311–317 Occhino F (2010) Is debt overhang causing firms to underinvest? Economic Commentary, pp 2010–2007 Oi WY (1961) The desirability of Price instability under perfect competition. Econometrica 29(1):58–64 Panizza U, Presbitero AF (2013) Public debt and economic growth in advanced economies: a survey. Swiss J Econ Stat 149(2):175–204 Philippon T, Schnabl P (2013) Efficient recapitalization. J Financ 68(1):1–42 Picarelli M, Vanlaer W, Marneffe W (2019) Does public debt produce a crowding out effect for public investment in the EU? ESM Working Paper Series 36 Reinhart C, Rogoff K (2010) Growth in a time of debt. Am Econ Rev 100(2):573–578 Roodman D (2009) A note on the theme of too many instruments. Oxf Bull Econ Stat 71(1):135–158 Segal G, Shaliastovich I, Yaron A (2015) Good and bad uncertainty: macroeconomic and financial market implications. J Financ Econ 117(2):369–397 Sen S, Kasibhatla KM, Stewart DB (2007) Debt overhang and economic growth – the Asian and the Latin American experiences. Econ Syst 31(1):3–11 Sun H (1998) Macroeconomic impact of direct foreign investment in China: 1979–96. World Economy 21(5):675–694 Traum N, Yang SCS (2015) When does government debt crowd out investment? J Appl Econ 30(1):24–45 Vanlaer W, Bielen S, Marneffe W (2019) Consumer confidence and household saving behaviors: a cross-country empirical analysis. Soc Indic Res 147(2):1–45 Vu N (2015) Stock market volatility and international business cycle dynamics: evidence from OECD economies. J Int Money Financ 50:1–15 Woo J, Kumar M (2015) Public debt and growth. Economica 82(328):705–739