Crisis Credit, Employment Protection, Indebtedness, and Risk

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

No 10958, Policy Research Working Paper Series from The World Bank

Abstract: This paper studies how credit guarantee and employment protection programs interact in supporting firms during crises, using real and financial administrative data for all firms and a quantitative macroeconomic model. Low interest rates encourage riskier firms to demand government-backed loans, while banks tend to reject those applications. The credit demand outweighs this screening response, expanding indebtedness. Given the opportunity cost of shutting down, the employment program’s take-up is unrelated to risk. The employment program mitigates the credit program expansion by supporting firms and enabling banks to screen them. Counterfactuals show how policy ingredients, including interest rate caps, limit macroeconomic risk.

Date: 2024-10-24
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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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