The effects of credit subsidies on development

Authors: António Antunes Tiago Cavalcanti Anne Villamil

Publish Date: 2014/04/09

Volume: 58, Issue: 1, Pages: 1-30

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Abstract

Under credit market imperfections the marginal product of capital may not be equalized resulting in misallocation and lower output Preferential interest rate policies are often used to remedy the problem This paper constructs a general equilibrium model with heterogeneous agents imperfect enforcement and costly intermediation Occupational choice and firm size are determined endogenously by an agent’s type ability and net wealth and credit market frictions The credit program subsidizes the interest rate on loans and requires a fixed application cost which might be null We find that the credit subsidy policy has no significant effect on output but it may have negative effects on wages The program is largely a transfer from households to a small group of entrepreneurs with minor aggregate effects We also provide estimates of the effects of reducing the frictions directly When comparing differences in US output per capita in a baseline case to simulations with counterfactually high frictions intermediation costs and enforcement explain about 20–25  of the output gap We include a transition analysisWe thank Breno Albuquerque Francesco Caselli Mário Centeno Fernando de Holanda Barbosa Filho Giammario Impullitti Marcelo Mello Marcelo dos Santos André Silva Arilton Teixeira and Pedro Teles for helpful comments and suggestions We have also benefited from comments by audiences at the EPGE/CAEN Meeting Lisbon Meeting on Institutions and Political Economy LuBraMacro meeting REAP Meeting Rice University SAET Meeting INSPERSP PIMES/UFPE PUCRJ ThemaCergy University of Cambridge University of Illinois and the Workshop on Advances in Economic Growth at University of St Andrews We thank for financial support INOVA and Fundação para a Ciência e Tecnologia grant PTDC/EGEECO/108858/2008 and Keynes Fund from the University of Cambridge

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