The effects of credit subsidies on development

Abstract

This paper studies the effects of interest rate credit subsidies on economic development in a general equilibrium model with heterogeneous agents, occupational choice and financial frictions. There are two financial frictions: a cost to intermediate loans and a limited liability problem which maps into the degree of enforcement of credit contracts in the economy. Occupational choice and firm size are determined endogenously by an agent's type (ability and net wealth) and the credit market frictions. We then add a credit program that subsidizes the interest rate on loans. There is a fixed cost (which might be null) to apply for such loans in the form of bureaucracy and regulations. We show that for the United States, an interest rate credit subsidy does not have a significant effect on output per capita, but it can have important negative effects on wages and government finances. For Brazil, a developing country in which financial repression is high and the government subsidies heavily loans, our counter-factual exercises show that if all interest subsidies were cut, no significant quantitative effect would occur on output per capita, wages, inequality or government finances. However, when the interest rate subsidy is fixed at the level observed in Brazil, but access to the credit program is increased, then output and wages might both increase, as long as the interest rate subsidy does not not affect directly the spread on non-subsidized loans.

Optimal Annuitization with Stochastic Mortality and Correlated Medical Costs

“…This value is at the higher end of the range estimated byAntunes, Cavalcanti and Villamil (2015) who use a baseline capital-output ratio of 2.55, based on the Penn World Tables 6.2. Below, we show that a smaller capital-output ratio reduces annuitization.…”

Efficient Financial Allocation and Productivity Growth in Brazil

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Macroeconomic costs of gender gaps in a model with entrepreneurship and household production

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