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

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. 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 intervention (social distancing, mass gathering restrictions and closure of schools and universities) and late reopening, and negative effects of hard intervention (closure of public venues and/or non-essential services) and early reopening. Third, we confirm these results using pre-pandemic local political preference as instrument for policy interventions. Our results are upheld for orthogonalized policy intervention indicators and in placebo tests. The effects are sector-dependent, influenced by pre-pandemic bank and municipality characteristics, and stronger for longer intervention duration and higher intervention speed. The evidence suggests clear policy implications.