Abstract Aggregate and sectoral effects of public investment crucially depend on the interaction between the output elasticity to public capital and intermediate inputs. We uncover this fact through the lens of a New Keynesian production network. This setting doubles the socially optimal amount of public capital relative to the one-sector model without intermediate inputs, leading to a substantial amplification of the public-investment multiplier. We also document novel sectoral implications of public investment. Although public investment is concentrated in far fewer sectors than public consumption, its effects are relatively more evenly distributed across industries. We validate this model implication in the data.

We provide evidence that the geographical segmentation of the municipal bond market — induced by state tax exemptions — leads banks to diversify their mortgage lending across states. Municipal bond holdings expose banks to local real-estate risk: these securities are largely backed by property-tax revenues with high elasticity to house prices. Consistent with a diversification motive, the effect is stronger for banks with weaker balance sheets, for those whose mortgage lending is highly concentrated in their home state, and towards areas whose housing markets are less correlated with those of the home state. Interestingly, this out-of-state expansion is accompanied by a relaxation of lending standards, as banks approve mortgages with lower FICO scores and higher debt-to-income ratios, which subsequently results in more non-performing loans. The relaxation of lending standards emerges in states where banks lack branch presence and in highly competitive markets, where expanding requires attracting borrowers through looser screening. Diversification thus may generate risk-taking as a by-product.

Abstract Did the rise of Chinese import competition in the early 2000s affect banks’ credit supply policies? Using bank-firm-level data on the universe of Spanish corporate loans, we find that banks rebalanced their loan portfolios away from firms facing Chinese import competition and toward profitable firms in nonexposed sectors. Banks supplied more credit also to the construction sector, albeit independently of firms’ profitability. This was not due to banks’ exposure to the housing boom. Rather, the geographical concentration of the manufacturing industries competing with China left local banks with few alternatives other than local construction firms to rebalance their loan portfolios.