Firm Financing During Sudden Stops: Can Governments Substitute Markets?

IMF Working Papers, April 11, 2025

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Canonical URL: Firm Financing During Sudden Stops: Can Governments Substitute Markets?

Authors: Miguel Acosta-Henao, Andrés Fernández, Patricia Gomez-Gonzalez, Sebnem Kalemli-Ozcan
Published: April 11, 2025
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798229005128.001

The paper analyzes whether central bank credit lines and government-backed guarantees helped mitigate the impact of the pandemic's sudden stop, characterized by the abrupt withdrawal of international capital, using administrative data on the universe of Chilean firms.
Regression discontinuity design evidence: eligible firms increased domestic borrowing at lower costs.
Policies reduced the cost of domestic debt compared to foreign debt, easing access to capital.
An open economy model explains complementarity of credit lines and guarantees in:
- relaxing collateral constraints;
- reducing financial intermediaries' risk aversion;
- boosting domestic credit supply amidst shrinking international flows.

Empirical strategy: regression discontinuity design using administrative data covering the universe of Chilean firms.
Identifies causal impact of eligibility for interventions on domestic borrowing volumes and borrowing costs.

Uses an open economy model to interpret empirical results.
Model highlights how credit lines and government guarantees operate together to:
- relax collateral constraints for firms;
- lower risk premia or risk aversion of financial intermediaries;
- increase domestic credit supply when international capital flows contract.

Central bank credit lines and government-backed guarantees can act as partial substitutes for international capital during sudden stops by:
- supporting domestic borrowing at lower costs for eligible firms;
- shifting financing away from relatively more expensive foreign debt toward domestic debt;
- stabilizing domestic credit supply through reduced intermediary risk aversion and improved collateral conditions.

Authors: Miguel Acosta-Henao, Andrés Fernández, Patricia Gomez-Gonzalez, Sebnem Kalemli-Ozcan
Date: April 11, 2025
Pages: 72
Volume: 2025
Issue: 072
Series: Working Paper No. 2025/072
DOI: https://doi.org/10.5089/9798229005128.001
Stock No: WPIEA2025072
ISBN: 9798229005128
ISSN: 1018-5941
Subject tags: Credit, Domestic credit, Domestic debt, External debt, Financial institutions, Loans, Money, Public debt
Keywords: Capital flows, Credit, Domestic credit, Domestic debt, finance mix, firm financing, FOGAPE-COVID credit, foreign currency, Global, governments substitute market, i. firm, Loans, open economy model, unconventional policies

IMF Working Paper — Firm Financing During Sudden Stops: Can Governments Substitute Markets? (Working Paper No. 2025/072, April 11, 2025).