Credit Guarantee and Fiscal Costs

Huixin Bi, Yongquan Cao () and Wei Dong

No RWP 22-09, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper studies the effectiveness of government-backed credit guarantees to the infrastructure sector, a policy tool adopted by a range of countries during recessions. We propose a two-sector model with financial intermediary frictions so that infrastructure producers rely on bank loans to finance their risky production. Governments can intervene in the credit market by providing a partial guarantee on those bank loans. We find that a credit guarantee increases infrastructure production, leading to a high fiscal multiplier in the longer run. In the near term, however, higher wages in the infrastructure sector crowd out labor supply in the private sector, dampening economic activity. Importantly, the higher leverage associated with credit expansion raises non-performing loans, and this channel is particularly pronounced if the government-backed credit guarantee lingers for a long period of time.

Keywords: fiscal policies; markets (search for similar items in EconPapers)
JEL-codes: E44 E62 (search for similar items in EconPapers)
Pages: 13
Date: 2022-09-02
New Economics Papers: this item is included in nep-dge and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.kansascityfed.org/Research%20Working%2 ... wp22-09bicaodong.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:94752

Ordering information: This working paper can be ordered from

DOI: 10.18651/RWP2022-09

Access Statistics for this paper

More papers in Research Working Paper from Federal Reserve Bank of Kansas City Contact information at EDIRC.
Bibliographic data for series maintained by Zach Kastens ().