Crowding-Out Effects of a Government-Owned Depository Institution: Evidence from a Natural Experiment in Japan

Beginning in 2000, Japan’s government-owned postal saving system experienced a rapid outflow of funds as a large number of 10-year fixed-rate Postal Saving Certificates (PSCs) that had been purchased during the period of high interest rates in the early 1990s were maturing. This paper exploits this episode as a natural experiment to investigate the crowding-out effects of a government-owned depository institution on local economies. The panel data of 47 prefectures from 1995 to 2004 show that the prefectures where local funds were heavily invested in the postal saving system in the early 1990s tended to experience a larger shift of funds into private banks from the postal saving system in the early 2000s, suggesting that the exogenous maturing of PSCs was in part responsible for the observed shifts in the allocation of local funds. More importantly, the (instrumented) flow of local funds to private banks from the postal saving system has statistically robust and economically important positive effects on local output and on the number of small firms, but not on the number of large firms. These results provide empirical support for the view that a government-owned depository institution has crowding-out effects on local economies and, in particular, on small firms that rely on local banks in direct competition with government-owned depository institutions for local deposits.