Changing the climate for banking: the economic effects of credit in a climate-vulnerable area

Abstract

We exploit plausibly exogenous variation in credit policy to study the real effects of credit. Producers in the semiarid, Brazil’s poorest and driest region, are eligible to apply for subsidized, abundant credit provided by a state-owned bank. Based on objective climate criteria, the federal government added new localities to the Brazilian semiarid. We show that the state-owned bank increased risky loans in the added localities in accordance with legislation, but we find neither a crowding-out of credit to other banks nor a rise in delinquency rates. Smaller-sized low-income producers have invested the cheaper credit to expand climate resilient livestock. We find a rise in the income of poor people, but no aggregate impacts on local production.