Crisis Credit, Employment Protection, Indebtedness, and Risk

Federico Huneeus, Joseph Kaboski, Mauricio Larrain, Sergio Schmukler and Mario Vera

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: We study how credit guarantee and employment protection programs interact by assisting firms during crisis times. In particular, we analyze how these government programs influence credit allocation, indebtedness, and risk at both micro and macro levels. The programs provide different incentives for firms. The low interest rate encourages riskier firms to demand government-backed credit, while banks tend to reject those credit applications. The credit demand outweighs this screening supply response, expanding micro-level indebtedness across the extensive and intensive margins among riskier firms. The uptake of the employment program is not associated with risk, as firms internalize the opportunity cost of reduced operations when sending workers home to qualify for assistance. The employment program mitigates the indebtedness expansion of the credit program by supporting firms and enabling banks to better screen firms. The macroeconomic risk of the credit program would increase by a third without the availability of the employment program.

Date: 2024-12
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Related works:
Working Paper: Crisis Credit, Employment Protection, Indebtedness, and Risk (2025)
Working Paper: Crisis Credit, Employment Protection, Indebtedness, and Risk (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:1035

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