On Government Credit Programs

Marco Espinosa-Vega, Bruce D. Smith, and Chong K. Yip
Federal Reserve Bank of Atlanta
Working Paper 98-2
February 1998

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Credit rationing is a common feature of most developing economies. In response to it, the governments of these countries often operate extensive credit programs and lend, either directly or indirectly, to the private sector. We analyze the macroeconomic consequences of a typical government credit program in a small open economy. We show that such programs increase long-run production if the economy is in a development trap and that such programs often lead to endogenously arising aggregate volatility. On the other hand, they may eliminate certain indeterminacies created by endogenous credit market frictions.

JEL classification: E5, O4

Key words: credit rationing, credit programs, financial intermediaries

The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Marco Espinosa-Vega, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8630, marco.espinosa@atl.frb.org; Bruce D. Smith, Economics Department, University of Texas at Austin, Austin, Texas 78712, 512/475-8548, bsmith@mundo. eco.utexas.edu; or Chong K. Yip, Economics Department, Chinese University of Hong Kong, Fung King Hei Building, Shatin, NT, Hong Kong, 852/2609-7057, chongkeeyip@cuhk.edu.hk.