Are Loan Guarantees Effective? The Case of Mexican Government Banks

Abstract

Mexican Government's Banks offer loan guarantees to private banks in order to spur credit directed to non-financial small and medium sized firms and this policy is examined here. Application of representative data to the comparative static analysis of the guarantee-use decision suggests that these schemes, as currently designed, are justifiable from an economic viewpoint. However, there is some evidence of inefficiency and ineffectiveness about the way these guarantee programs operate. Marginal take-up is plausibly explained only by the benefits perceived by private bankers.

Keywords: Adoption incentives, bank credit, government-loan guarantees, Mexican banks

JEL Classification: C22, D61, G21, G38