Household Credit as Stimulus? Evidence from Brazil

From 2011 to 2014, the Brazilian government conducted a heavily advertised major credit expansion program through government banks as part of its effort to stimulate the economy. Using administrative data on individual-level borrowing and spending, we find that the program led to a substantial rise in borrowing by government employees, especially those with low financial literacy. We trace the impact of credit stimulus on borrowers’ consumption through the 2011-16 business cycle, and find that the credit stimulus resulted in higher consumption volatility and lower average consumption over the cycle. Our results suggest a potential downside of using household credit as stimulus in emerging markets.