The Impact of Government Driven Loans in the Monetary Transmission Mechanism: what can we learn from firm level data?
Government driven credit had been expanding in Brazil since the financial crisis of 2007/2008, reaching almost half of the total credit in 2012. While this large participation may buffer the banking system from external shocks, it undoubtedly affects the transmission of monetary policy. Using a huge repository of corporate loan contracts, composing an unbalanced panel of almost 300,000 non financial firms between 2006 and 2012, this paper investigates its impact on the monetary transmission mechanism. Our results show that the credit channel of monetary policy is less effective for firms with government driven loans access. This effect is shown in the smaller variation both in the total amount of loans and in the lending rate charged by private banks on free loan market. Merging loans database with employment data from RAIS (Annual Social Information Report) we also investigate the effects of monetary policy rate on employment. Our results indicate that changes in policy rate have smaller effect on the level of employment for firms with more access to earmarked and government owned banks loans. Additionally, we examine whether firms with larger fraction of government driven loans are better able to insulate themselves from the effects of external shocks, with resulting attenuated impact of those shocks on loans growth, interest rate on private loans and employment growth. The evidence we found confirms this hypothesis