Do Firms Need Cheaper Credit to Grow? investigating the effectiveness of subsidized earmarked loans

Daniel Grimaldi and Jose Ornelas

No 599, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: This paper explores a unique event that abruptly and unexpectedly increased the subsidy levels associated with a traditional earmarked credit line in Brazil. Using a local difference-in-differences approach, we find strikingly different results depending on firms’ size. For mid-large firms, despite an increase in subsidy intake of almost 90%, there were no relevant effects on employment or debt, suggesting they mostly used new loans to replace older (more expensive) debt. For smaller firms, we observed a similar increase in the dosage of subsidies, but we also saw an increase in earmarked debt (roughly 75%) and employment (around 6% in the number of employees and 10% in the payroll). However, all labor-related effects were short-lived and vanished after two years. A cost-effectiveness analysis for a two-year window shows that monthly credit subsidies were higher than the increase in the affected firm’s monthly payroll by BRL 393 for micro and small firms and by BRL 165,685 for mid-large firms.

Date: 2024-09
New Economics Papers: this item is included in nep-fdg and nep-sbm
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