We exploit plausibly exogenous variation in credit policy to study the real effects of credit.
Producers in the semiarid, Brazil's poorest and driest region, are eligible to apply for
subsidized, abundant credit provided by a state-owned bank. Based on objective climate
criteria, the federal government added new localities to the Brazilian semiarid. We show that
the state-owned bank increased risky loans in the added localities in accordance with
legislation, but we find neither a crowding-out of credit to other banks nor a rise in …