The Nuanced Role of Government Credit in Monetary Policy Transmission
January 9, 2026
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Summary
We investigate the role of government credit in monetary policy transmission, using detailed credit registry data from Brazil. We find that government direct credit can effectively support small and medium-sized enterprises (SMEs) in a tight monetary policy environment, aligning with developmental objectives. But it comes at the cost of diminishing the overall effectiveness of monetary policy transmission. We also uncover complexities introduced by government-subsidized lending, where the impact of monetary policy transmission is influenced by factors such as credit market segments, lending relationships, and prevailing monetary policy conditions. These insights provide valuable guidance for policymakers on the transmission of monetary policy and the trade-offs involved in government credit programs.
Subject: Bank credit, Central bank policy rate, Collateral, Credit, Financial institutions, Financial services, Loans, Money
Keywords: Bank credit, Brazil, Central bank policy rate, Collateral, Credit, earmarked credit, emerging market, government banks, government direct credit, Loans, Monetary policy, SME
Pages:
37
Volume:
2026
DOI:
Issue:
004
Series:
Working Paper No. 2026/004
Stock No:
WPIEA2026004
ISBN:
9798229035699
ISSN:
1018-5941
