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Cheap Credit, Lending Operations, and International Politics: The Case of Global Microfinance




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    • Garmaise is at UCLA Anderson. Natividad is at NYU Stern. We thank Damian von Stauffenberg and MicroRate for access to the data, Cam Harvey (the Editor), two anonymous referees, Viral Acharya, Ray Fisman, Matthias Kahl, Justin Murfin, and audiences at NYU Stern, UCLA Anderson, the NBER, Drexel, the International Society for New Institutional Economics, the Peruvian Banking Superintendency (SBS), the Peruvian Central Bank, and Universidad de Piura for useful comments. Natividad acknowledges the financial support of the Berkley Center at NYU Stern.


The provision of subsidized credit to financial institutions is an important and frequently used policy tool of governments and central banks. To assess its effectiveness, we exploit changes in international bilateral political relationships that generate shocks to the cost of financing for microfinance institutions (MFIs). MFIs that experience politically driven reductions in total borrowing costs hire more staff and increase administrative expenses. Cheap credit leads to greater profitability for MFIs and promotes a shift toward noncommercial loans but has no effect on total overall lending. Instead, the additional resources are either directed to promoting future growth or dissipated.