Price Frictions in Credit Markets: Evidence from Belgium's 2020 Credit Guarantee Scheme

Yasin Kürsat Önder () and Jose Villegas ()
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Jose Villegas: -

Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium from Ghent University, Faculty of Economics and Business Administration

Abstract: A central challenge of macroeconomic policy is stimulating demand during crises. We show that the price of credit, not just access, is a key friction. Exploiting Belgium’s 2020 Credit Guarantee Scheme—where guaranteed loan rates fell 25 basis points for firms below 50 employees, with fees remitted to the government—we isolate a pure borrowing-cost shock. Lower rates increased investment, employment, revenues, and survival, mainly through substitution away from costlier market loans. A structural quantitative model matches empirical elasticities and shows that unexpected guarantees raise welfare, but recurrent policies increase leverage, elevate default risk, and can generate welfare losses.

Keywords: Credit guarantees; price frictions; defaults; regression discontinuity design; debt overhang (search for similar items in EconPapers)
JEL-codes: E32 G21 H81 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2025-08
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Persistent link: https://EconPapers.repec.org/RePEc:rug:rugwps:25/1118

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