Establishing the presence of a causal link from public debt to economic growth and investment has proved challenging. In a new column on VoxEU, Professors Yi Huang and Ugo Panizza from the Centre for Finance and Development and IMF economist Richard Varghese use data for nearly 550,000 firms in 69 countries to show that government debt affects corporate investment by tightening the credit constraints faced by private firms. Higher levels of public debt increase the correlation between investment and cashflow for firms that are more likely to be credit constrained – i.e. unlisted, small, and young firms – but appear to have no effect on the correlation between cash and investment of listed, well-established, and large firms.
Read the entire column here on VoxEU. The column has been first published on VoxEU on 4 December 2019.
In our series Finance & Development Expertise, we regularly present articles and other publications from the faculty of the Centre for Finance and Development (CFD). These include new publications as well as some of the best pieces from the archives.