Alleviating Constraints or Targeting the Unsophisticated? The Government-led Household Credit Expansion in Brazil

From 2011 to 2014, the Brazilian government conducted a heavily advertised major credit expansion program through government-owned banks. Using administrative data on individual-level borrowing and spending, we find that the program led to a substantial rise in borrowing by public sector employees, especially those that were less financially sophisticated. Real interest rates on the debt were high, and they did not fall materially during the expansion. As a result of the borrowing done in the expansion, less financially sophisticated public sector workers experienced higher consumption volatility and lower average consumption through the 2011 to 2016 business cycle. Individuals more likely to face a borrowing constraint did not increase borrowing during the credit expansion.