The Effect of the Global Banking Crisis on Credit Markets in Chile

The Chilean economy presents an excellent case study through which to examine questions of the policy desirability of globally integrated financial markets. In this paper we study whether increased lending by the Chilean government bank created positive economic effects for Chilean firms after the global financial crisis of 2008. We also study whether foreign exposures of Chilean bank liabilities altered the lending patterns of those banks during this period. We find positive sales effects for Chilean firms who took a government loan in the immediate aftermath of the financial crisis. We also find that international financial integration does not result in negative domestic consequences transmitted through the channel of foreign exposure after an external liquidity crisis. A striking feature of our paper is the fact that, knowing there is only one government bank in Chile from which to borrow, we are able to link bank lending data directly with the firm survey data. We can thus with confidence recommend using foreign financial markets as a tool for growth for developing countries, particularly when combined with prudent counter-cyclical government lending policies.