Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/314691 
Year of Publication: 
2025
Series/Report no.: 
CESifo Working Paper No. 11652
Publisher: 
CESifo GmbH, Munich
Abstract: 
This paper studies how credit guarantee and employment protection programs interact in assisting firms during crises times. The paper analyzes how these government programs influence credit allocation, indebtedness, and risk at both the micro and macro levels. The programs provide different incentives for firms. The low interest rate encourages riskier firms to demand government-backed credit, while banks tend to reject those credit applications. The credit demand outweighs this screening supply response, expanding micro-level indebtedness across the extensive and intensive margins among riskier firms. The uptake of the employment program is not associated with risk, as firms internalize the opportunity cost of reduced operations when sending workers home to qualify for assistance. The employment program mitigates the indebtedness expansion of the credit program by supporting firms and enabling banks to screen firms better. Macroeconomic risk of the credit program would increase by a third without the availability of the employment program.
Subjects: 
banking
credit demand
credit supply
crises
Covid-19
debt
employment protection
firm risk
macroeconomic risk
public credit guarantees
JEL: 
G21
G28
G32
G33
G38
I18
Document Type: 
Working Paper
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