Credit subsidies: bad idea or misuse?

Abstract

Using a heterogeneous agent model with incomplete markets and entrepreneurship, I show that development banks can generate significant and positive impacts in an economy if they target the infrastructure sector and are funded through low distortionary taxes. Calibrating the model for the Brazilian economy, I assess that a better credit policy by the Brazilian Development Bank (BNDES) can generate a welfare gain around 10%. However, with the current format, the subsidy policies in Brazil are, at best, useless to foster development, besides transferring welfare from the poor to the rich.