Credit demand interest rate sensitivity: anticipation effects in a large subsidized program

Purpose We estimate the interest rate demand sensitivity of capital goods demand, exploiting a unique dataset and identification method. Design/methodology/approach High-frequency loan data allow identifying the demand curve using Brazilian data. Institutional setting suggests that interest changes were exogenous to credit demand variation. Promotion effects influence estimates significantly and should be considered when designing credit subsidies and countercyclical investment policies. Findings Our results indicate a capital good demand sensitivity of −0.40 to −0.50 in credit volume given a 1p.p. increase in interest rates or an elasticity of −2.0 to −2.5. The average loan size elasticity is much smaller, about −0.50, suggesting that the extensive margin is much more sensitive to interest rate changes. Originality/value This is one of the few papers in the literature to estimate the elasticity of capital goods credit demand and the first one for Brazil.