Unconventional credit policies during crises: A structural analysis of the Chilean experience during the COVID-19 pandemic

Abstract

With the economy facing an unprecedented hit due to the COVID-19 pandemic, the Central Bank of Chile and the Chilean government jointly implemented several programs aimed at increasing liquidity and maintaining the flow of funds in the economy. In this paper, we extend the model described in Calani et al. (2022), a structural large-scale DSGE model with a financial system and financial frictions, to assess the impact of the different credit programs implemented during the COVID-19 crisis. We find that the policies’ most significant impact was due to the FOGAPE program and from their joint ability to reduce credit risk. The quantitative analysis carried on in this paper shows that the contraction of GDP in 2020 was between 2.7 and 5.4 percentage points milder thanks to the implemented liquidity and credit policies.