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Macroeconomic Effects of Subsidized Credit

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  • Thiago F. R. Abreu
  • Elcyon C. R. Lima

Abstract

This paper examines the macroeconomic effects of subsidized credit through a Dynamic Stochastic General Equilibrium (DSGE) model tailored to the Brazilian economy. The model integrates financial frictions, capital quality shocks, fiscal dynamics that reflect Brazil’s reliance on revenue-driven adjustments, a distinction between subsidized and market interest rates, and the financing of credit policies through distortionary taxes. The results highlight that the macroeconomic impact of subsidized credit depends critically on the nature of the economic shock. It stabilizes the economy during demand-side shocks, can weaken the efficiency of monetary policy, and creates fiscal trade-offs. However, in the presence of negative capital quality shocks, credit subsidies can amplify economic fluctuations by tightening financial constraints, raising capital financing costs, and reducing credit availability. These findings provide valuable insights for the design of credit policies in emerging markets with fiscal constraints.

Suggested Citation

  • Thiago F. R. Abreu & Elcyon C. R. Lima, 2025. "Macroeconomic Effects of Subsidized Credit," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 17(8), pages 1-94, August.
    • Handle: RePEc:ibn:ijefaa:v:17:y:2025:i:8:p:94
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    References listed on IDEAS

    as
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    2. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    3. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 345-370, April.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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