The International Monetary Fund published a working paper assessing how government-directed credit affects monetary policy transmission, using Brazil’s loan-level credit registry data. It finds that direct lending by government banks can cushion small and medium-sized enterprises (SMEs) when monetary policy tightens by lowering the interest rate pass-through, but that this comes with weaker overall monetary policy transmission, while subsidized or earmarked lending via private banks introduces relationship- and cycle-dependent effects. Using a 50 percent random sample of firms covering roughly 55 million newly originated loans from September 2011 to September 2016, the analysis splits monetary conditions into a loosening phase (September 2011 to March 2013) and a tightening phase (April 2013 to September 2016). During tightening, the preferred specification estimates that a 10 basis point monetary policy shock is associated with a 56 basis point lower pass-through for government direct credit to SMEs, with no statistically significant difference during loosening. For private bank credit, simply having an earmarked lending relationship is associated with a stronger pass-through to non-earmarked credit for large firms during tightening (about 25 basis points higher pass-through for a 10 basis point shock), consistent with cross-subsidization. At the intensive margin, longer earmarked relationships are associated with stronger pass-through to earmarked loans during tightening (about 19 basis points higher pass-through for SMEs for a one-year longer relationship and a smaller effect for large firms) and weaker pass-through during loosening, while relationship length does not show a significant impact on non-earmarked loan rates. As an IMF Working Paper, the publication is positioned as research in progress intended to elicit comments and encourage debate.
International Monetary Fund working paper finds government credit can support SMEs in tightening cycles while weakening monetary policy transmission
The IMF's working paper analyzes government-directed credit's impact on monetary policy in Brazil, revealing that direct lending by government banks can mitigate interest rate pass-through for SMEs during monetary tightening but weakens overall policy transmission. The study also finds that subsidized lending via private banks affects pass-through rates based on relationship length and economic cycles.