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The Effectiveness of Public Credit Guarantees in the Japanese Loan Market

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  • Uesugi, Iichiro
  • Sakai, Koji
  • Yamashiro, Guy M.

Abstract

This paper examines the effectiveness of public credit guarantee programs in not only increasing the availability of loans to small and medium enterprises (SMEs), but in also improving the ex-post performance of borrowing firms. Using a unique panel data set, we identify the effects of a massive credit guarantee program implemented by the Japanese government from 1998-2001. While we do find that the availability of loans increased for program participants, when loans were provided by undercapitalized banks the increased liquidity persisted for only a few years. Further, the ex-post performance of program participants, with the exception of firms with sizable net worth, deteriorated relative to their non-participating counterparts.

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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/16255/1/pie_dp400.pdf
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Bibliographic Info

Paper provided by Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University in its series PIE/CIS Discussion Paper with number 400.

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Length: 39 p.
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:hit:piecis:400

Note: 3 September 2008, An earlier version of this paper circulated as "Effectiveness of Credit Guarantees in the Japanese Loan Market," 2006 RIETI Discussion Paper Series 06-E-04.
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Keywords: Credit crunch; Small and Medium Enterprises; Loan guarantees; Matching estimation;

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References

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  1. Motonishi, Taizo & Yoshikawa, Hiroshi, 1999. "Causes of the Long Stagnation of Japan during the 1990s: Financial or Real?," Journal of the Japanese and International Economies, Elsevier, vol. 13(3), pages 181-200, September.
  2. Barbara Sianesi, 2004. "An Evaluation of the Swedish System of Active Labor Market Programs in the 1990s," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 133-155, February.
  3. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  4. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, December.
  5. Stephen D. Williamson, 1994. "Do informational frictions justify federal credit programs?," Proceedings, Federal Reserve Bank of Cleveland, pages 523-551.
  6. Stulz, ReneM. & Johnson, Herb, 1985. "An analysis of secured debt," Journal of Financial Economics, Elsevier, vol. 14(4), pages 501-521, December.
  7. Cowling, Marc, 2007. "The Role of Loan Guarantee Schemes in Alleviating Credit Rationing in the UK," MPRA Paper 1613, University Library of Munich, Germany.
  8. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  9. Riding, Allan L. & HainesJR., George, 2001. "Loan guarantees: Costs of default and benefits to small firms," Journal of Business Venturing, Elsevier, vol. 16(6), pages 595-612, November.
  10. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2005. "SBA-loan guarantees and local economic growth," Working Paper 0503, Federal Reserve Bank of Cleveland.
  11. Boot, Arnoud W A & Thakor, Anjan V & Udell, Gregory F, 1991. "Secured Lending and Default Risk: Equilibrium Analysis, Policy Implications and Empirical Results," Economic Journal, Royal Economic Society, vol. 101(406), pages 458-72, May.
  12. Wenli Li, 1998. "Government loan, guarantee, and grant programs: an evaluation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Fall, pages 25-52.
  13. Gale, William G., 1990. "Federal lending and the market for credit," Journal of Public Economics, Elsevier, vol. 42(2), pages 177-193, July.
  14. Mankiw, N Gregory, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 455-70, August.
  15. William G. Gale, 1988. "Economic Effects of Federal Credit Programs," UCLA Economics Working Papers 483, UCLA Department of Economics.
  16. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
  17. Diamond, Douglas-W, 2001. "Should Japanese Banks Be Recapitalized?," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 19(2), pages 1-19, May.
  18. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  19. Ben R. Craig & William E. Jackson, III & James B. Thomson, 2007. "On government intervention in the small-firm credit market and its effect on economic performance," Working Paper 0702, Federal Reserve Bank of Cleveland.
  20. Bruce D. Smith & Michael J. Stutzer, 1989. "Credit Rationing and Government Loan Programs: A Welfare Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 177-193.
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Cited by:
  1. Heshmati, Almas, 2013. "The Effect of Credit Guarantees on R&D Investment of SMEs in Korea," IZA Discussion Papers 7851, Institute for the Study of Labor (IZA).
  2. Ono, Arito & Sakai, Koji & Uesugi, Iichiro, 2011. "The Effects of Collateral on Firm Performance," Working Paper Series 5, Center for Interfirm Network, Institute of Economic Research, Hitotsubashi University.
  3. Raphael W. Lam & Jongsoon Shin, 2012. "What Role Can Financial Policies Play in Revitalizing SMEs in Japan?," IMF Working Papers 12/291, International Monetary Fund.

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