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Price Frictions in Credit Markets: Evidence from Belgium's 2020 Credit Guarantee Scheme

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  • Yasin Kürsat Önder

  • Jose Villegas

Abstract

A central challenge of macroeconomic policy is stimulating demand during crises. We show that the price of credit, not just access, is a key friction. Exploiting Belgium’s 2020 Credit Guarantee Scheme—where guaranteed loan rates fell 25 basis points for firms below 50 employees, with fees remitted to the government—we isolate a pure borrowing-cost shock. Lower rates increased investment, employment, revenues, and survival, mainly through substitution away from costlier market loans. A structural quantitative model matches empirical elasticities and shows that unexpected guarantees raise welfare, but recurrent policies increase leverage, elevate default risk, and can generate welfare losses.

Suggested Citation

  • Yasin Kürsat Önder & Jose Villegas, 2025. "Price Frictions in Credit Markets: Evidence from Belgium's 2020 Credit Guarantee Scheme," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1118, Ghent University, Faculty of Economics and Business Administration.
    • Handle: RePEc:rug:rugwps:25/1118
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    File URL: http://wps-feb.ugent.be/Papers/wp_25_1118.pdf
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    References listed on IDEAS

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    1. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
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    4. Matias D. Cattaneo & Nicolas Idrobo & Rocio Titiunik, 2019. "A Practical Introduction to Regression Discontinuity Designs: Foundations," Papers 1911.09511, arXiv.org.
    5. McCrary, Justin, 2008. "Manipulation of the running variable in the regression discontinuity design: A density test," Journal of Econometrics, Elsevier, vol. 142(2), pages 698-714, February.
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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