Government spending and credit market: Evidence from Italian (NUTS 3) provinces

This study examines the effects of government spending shocks on the Italian credit market using NUTS 3 data over the sample period 2011-2018. The empirical methodology is based on a local projection IV and the identification of a public spending shock is achieved by constructing a Bartik instrument. The empirical evidence shows a mild positive effect of 1% increase in government spending relative to GDP on the growth of the volume loans relative to GDP. However, the empirical findings show that government spending does not help to ameliorate neither the "size bias," that is the financial constraints which small firms face relative to larger ones, nor the "home bias" in lending related to the process of bank consolidation in Italy.