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.

Original source View in tracker