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The COVID-19 shock and firm financing: Government or Market or Both?

Miguel Acosta-Henao, Andres Fernandez, Patricia Gomez-Gonzalez and Sebnem Kalemli-Ozcan
Additional contact information
Andres Fernandez: International Monetary Fund
Patricia Gomez-Gonzalez: Fordham University, Department of Economics
Sebnem Kalemli-Ozcan: University of Maryland

Fordham Economics Discussion Paper Series from Fordham University, Department of Economics

Abstract: We study the interaction between government’s fiscal support policies and firms' market financing. Using regulatory data on the universe of Chilean firms, we test the role of Central Bank's special credit line to domestic banks and government-backed credit guarantees provided during COVID-19. Through a regression discontinuity design, we find that firms with access to government support policies increased their domestic debt relative to foreign debt, even though foreign debt in foreign currency is much cheaper than domestic debt in local currency under deviations from the UIP. Further results document how policies reduced UIP premia for firms eligible of guarantees. An open economy model with heterogeneous firms helps rationalize these facts. A shock to the cost of external financing leads to a higher mass of firms with access to domestic credit when the government subsidizes the cost of domestic credit. The government's credit guarantees loosen domestic collateral constraints and reduce banks' risk aversion, while the central bank’s special credit line increases the aggregate supply of credit in the economy.

Keywords: Capital flows; firm financing; unconventional policies; COVID-19 (search for similar items in EconPapers)
JEL-codes: F32 F41 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-ban and nep-sbm
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Working Paper: The COVID-19 Shock and Firm Financing: Government or Market? Or Both? (2022) Downloads
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