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Do Firms Need Cheaper Credit to Grow? investigating the effectiveness of subsidized earmarked loans

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  • Daniel Grimaldi
  • Jose Renato Haas Ornelas

Abstract

This paper explores a unique event that abruptly and unexpectedly increased the subsidy levels associated with a traditional earmarked credit line in Brazil. Using a local difference-in-differences approach, we find strikingly different results depending on firms’ size. For mid-large firms, despite an increase in subsidy intake of almost 90%, there were no relevant effects on employment or debt, suggesting they mostly used new loans to replace older (more expensive) debt. For smaller firms, we observed a similar increase in the dosage of subsidies, but we also saw an increase in earmarked debt (roughly 75%) and employment (around 6% in the number of employees and 10% in the payroll). However, all labor-related effects were short-lived and vanished after two years. A cost-effectiveness analysis for a two-year window shows that monthly credit subsidies were higher than the increase in the affected firm’s monthly payroll by BRL 393 for micro and small firms and by BRL 165,685 for mid-large firms.

Suggested Citation

  • Daniel Grimaldi & Jose Renato Haas Ornelas, 2024. "Do Firms Need Cheaper Credit to Grow? investigating the effectiveness of subsidized earmarked loans," Working Papers Series 599, Central Bank of Brazil, Research Department.
    • Handle: RePEc:bcb:wpaper:599
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    File URL: https://www.bcb.gov.br/content/publicacoes/WorkingPaperSeries/WP599v2.pdf
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    References listed on IDEAS

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