Credit Supply Shocks During a Nonfinancial Recession

Alcaraz, Carlo; Amoroso, Nicolas; Oviedo Moguel, Rodolfo; Rivadeneira, Alex; Samaniego de la Parra, Brenda; Sapriza, Horacio

Briefing

Credit Supply Shocks During a Nonfinancial Recession

Abstract: Credit supply in Mexico tightened during the nonfinancial COVID-19 recession, not due to banks' financial health but primarily due to heightened risk aversion. Negative credit supply shocks led to reduced firm employment and increased firm exit probability, especially among financially constrained firms (those that were smaller, younger and had high external financial dependence). The employment decline was largely driven by increased job outflows (separations) rather than reduced job inflows (new hires), particularly for women and low-tenure and temporary workers in small, young firms. Credit supply shocks accounted for a significant portion of the employment decrease among small firms during the pandemic's initial year, an impact comparable to those observed in financial recessions. Policy interventions focusing solely on injecting liquidity may be less effective in nonfinancial recessions. Instead, measures like government-backed loan guarantees could be more beneficial.