Finance: Research, Policy and Anecdotes

I have just finished my third COVID-19 paper, this time on the effect of emergency loans on consumption in Iran. In this paper, joint with Mohammad Hoseini, we assess the impact of emergency loans the Iranian government offered in April to all but the richest 5% of households on consumption across different types of consumption.  Specifically, we use daily data in April/May (the Iranian month of Ordibehesht) of POS (in-store) and on-line transactions across provinces and across different types of consumption and services and different retail segments. Our treatment period is the first week after the first (and largest) loan wave, with the first three weeks as robustness test. Our control period are other days in the same month and the same month in 2019. We find that emergency loans are positively related with higher consumption of non-durable and semi-durable goods, while there is no significant effect on the consumption of durables or asset purchases, suggesting that the emergency loans were predominantly used for their intended purpose. Our coefficient estimates suggest that two thirds of the emergency loans went into non-durable rather than semi-durable consumption, with the largest increase in absolute value in consumption of food and beverages. The effects were strongest in the first few days and then dissipated over time. We find effects only for in-store but not online transactions and in poorer rather than richer provinces, suggesting that it is the poorer who reacted more strongly with higher consumption to the emergency loans.

So, all in all, the emergency loans seem to have met its objective. The fact that consumers react to temporary income changes (and even though they have to be repaid) clearly shows the existence of liquidity and credit constraints. Our findings, however, raise further questions, such as: as these support payments are in the form of loans, to be repaid starting in July-August 2020 there are concerns of repayment burdens on the lower income segments, which calls for assessing the effect of repayments (out of income subsidies) on consumption patterns. We will assess this in future work, data permitting.

A longer discussion of the paper is in this Vox column and the paper will come out shortly in the next issue of Covid Economics.

Overview