COVID-19, Policy Interventions and Credit: The Brazilian Experience

Norden, Lars; Mesquita, Daniel; Wang, Weichao

The COVID-19 pandemic caused a global health and economic crisis to which governments responded with massive policy interventions. Using Brazil as a testing ground, we investigate the influence of the pandemic and ensuing policy interventions on local credit markets. First, we find that the pandemic has a significantly negative impact on local credit. Second, using a novel manually collected database on the staggered municipal government policy interventions, we show heterogenous effects of interventions: positive effects of soft interventions (e.g., social distancing and mass gathering restrictions) and late reopening, and negative effects of hard interventions (e.g., closure of non-essential services) and early reopening. Third, we find that state-owned banks grant more local credit than privately owned banks during the COVID-19 crisis but this difference is less pronounced than it was in the 2008 Financial Crisis. We confirm our results using pre-pandemic local political preference as instrument for policy interventions and orthogonalized policy intervention indicators, and in placebo tests.