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The COVID-19 shock and firm financing: Government or Market or Both?

Author

Listed:
  • Miguel Acosta-Henao

    (Central Bank of Chile)

  • Andres Fernandez

    (International Monetary Fund)

  • Patricia Gomez-Gonzalez

    (Fordham University, Department of Economics)

  • Sebnem Kalemli-Ozcan

    (University of Maryland)

Abstract

We study the interaction between government’s fiscal support policies and firms' market financing. Using regulatory data on the universe of Chilean firms, we test the role of Central Bank's special credit line to domestic banks and government-backed credit guarantees provided during COVID-19. Through a regression discontinuity design, we find that firms with access to government support policies increased their domestic debt relative to foreign debt, even though foreign debt in foreign currency is much cheaper than domestic debt in local currency under deviations from the UIP. Further results document how policies reduced UIP premia for firms eligible of guarantees. An open economy model with heterogeneous firms helps rationalize these facts. A shock to the cost of external financing leads to a higher mass of firms with access to domestic credit when the government subsidizes the cost of domestic credit. The government's credit guarantees loosen domestic collateral constraints and reduce banks' risk aversion, while the central bank’s special credit line increases the aggregate supply of credit in the economy.

Suggested Citation

  • Miguel Acosta-Henao & Andres Fernandez & Patricia Gomez-Gonzalez & Sebnem Kalemli-Ozcan, 2023. "The COVID-19 shock and firm financing: Government or Market or Both?," Fordham Economics Discussion Paper Series dp2023-03er:dp2023-03, Fordham University, Department of Economics.
  • Handle: RePEc:frd:wpaper:dp2023-03er:dp2023-03
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    References listed on IDEAS

    as
    1. Gita Gopinath & Şebnem Kalemli-Özcan & Loukas Karabarbounis & Carolina Villegas-Sanchez, 2017. "Capital Allocation and Productivity in South Europe," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(4), pages 1915-1967.
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    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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