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Short-term Finance, Long-term Effects: Theory and Evidence from Morocco

Author

Listed:
  • Kenza Benhima

    (Department of Economics, University of Lausanne)

  • Omar Chafik

    (Bank Al-Maghrib)

  • Min Fang

    (Department of Economics, University of Florida)

  • Wenxia Tang

    (Department of Economics, University of Lausanne)

Abstract

We study the effect of working capital loan guarantee programs on firm growth and their aggregate implications. Using a Moroccan firm-level dataset, we show that firms with guaranteed short-term loans (i) decrease their cash ratio, (ii) expand their production scale homogeneously and persistently, and that (iii) participation in the guarantee program is humped- shaped in firm size. We rationalize these findings in a heterogeneous-firm model with collateral and working capital constraints. First, we show that while relaxing collateral constraints on short-term loans always has a positive short-term effect on firm growth as firms reallocate cash to capital, persistent effects on firm scale depend on the existence and size of intertemporal distortions. Second, the combination of a flat fixed participation cost and size-dependent collateral constraints explain the non-monotonous participation rate. The interaction of the collateral constraint with these two frictions is crucial to determine the aggregate effect of a loan guarantee program. We parameterize the model to our Moroccan firm-level data. We show that the growth and welfare gains of expanding credit guarantee programs through a higher guaranteed amount or a lower participation cost are substantial, with the former generating relatively more growth while also increasing participation.

Suggested Citation

  • Kenza Benhima & Omar Chafik & Min Fang & Wenxia Tang, 2022. "Short-term Finance, Long-term Effects: Theory and Evidence from Morocco," Working Papers 002003, University of Florida, Department of Economics.
    • Handle: RePEc:ufl:wpaper:002003
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    References listed on IDEAS

    as
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    More about this item

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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