The Nuanced Role of Government Credit in Monetary Policy Transmission

Sophia Chen, Deniz Igan, Leila Aghabarari and Bernardus Van Doornik

No 2026/004, IMF Working Papers from International Monetary Fund

Abstract: We investigate the role of government credit in monetary policy transmission, using detailed credit registry data from Brazil. We find that government direct credit can effectively support small and medium-sized enterprises (SMEs) in a tight monetary policy environment, aligning with developmental objectives. But it comes at the cost of diminishing the overall effectiveness of monetary policy transmission. We also uncover complexities introduced by government-subsidized lending, where the impact of monetary policy transmission is influenced by factors such as credit market segments, lending relationships, and prevailing monetary policy conditions. These insights provide valuable guidance for policymakers on the transmission of monetary policy and the trade-offs involved in government credit programs.

Keywords: Monetary policy; government banks; government direct credit; earmarked credit; SME; emerging market; Brazil (search for similar items in EconPapers)
Pages: 37
Date: 2026-01-09
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