Do loan subsidies boost the real activity of small firms?

We investigate the effects of subsidized loans on the real activity of small firms. Despite the lack of theoretical consensus, subsidized loans have been considered or used in many countries after the global financial crisis and during the COVID-19 crisis to alleviate the external financing constraints and stimulate the real activity of small firms. We provide empirical evidence on this policy tool by studying the impact of a large-scale subsidized loan program implemented in Hungary in 2013. Utilizing comprehensive credit registry and firm microdata, we find that subsidized loans were not only highly effective at promoting investment and job creation, but they also enhanced the productive efficiency of firms over time. Meanwhile, there was significant heterogeneity both in the benefits from and access to subsidized loans. While firms with better bank relationships received more subsidized loans, firms with lower net working capital and more severe credit constraints responded more strongly to them, which raises allocation considerations. Published by Elsevier B.V.