How high local public debt and local public banks crowd out private investment in Germany – and what the debt brake has to do with it
In a recent column in VoxEU together with Michael Stiefel (UZH) and Iryna Stewen (JGU Mainz)) we discuss our new CEPR discussion paper Growing Like Germany: Local public debt, local banks, low private investment. The paper shows that local government debt in Germany crowds out private investment to the tune of 1 percent of GDP per year. The reason: Forced to lend to local governments by their statutory mandate, local public banks try to “make up” for the low-yields on municipal debt by charging SME higher rates in what are locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, as we argue, is a direct consequence of the debt brake at the federal and state levels which shifted a lot of expensive government task to municipalities.
Mathias Hoffmann is Professor at the Department of Economics at the University of Zurich. His research focuses on the macroeconomic aspects of international financial integration and on the link between financial markets and the macro-economy more generally. His recent published articles include papers on the determinants of international capital flows and imbalances, the international transmission of business cycles, on international risk sharing, banking regulation, and housing markets. Prior to arriving in Zurich, he was Professor at the University of Dortmund in Germany and a Lecturer at Southampton University (UK). He holds a PhD in Economics from the European University Institute in Florence and obtained his undergraduate education in economics and mathematics at WHU School of Management, Brandeis University and the University of Bonn.
Mathias Hoffmann is affiliated with the University of Zurich’s research priority program in financial regulation (URPPP FinREG), a fellow of CESifo Munich and of the Centre for Applied Macroeconomic Analysis (CAMA) at the Australian National University, and has held visiting positions at the University of California at Berkeley, the Deutsche Bundesbank, the Bank of Finland, the Hong Kong Monetary Authority, the Bank for International Settlements, Norges Bank, Keio University and Stanford University.