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December 1983

Government Loan and Guarantee Programs

by Joel Fried

Joel Fried examines the economic effects of government direct loans and loan guarantee programs. He concludes that, although both government direct loans and loan guarantees tend to increase aggregate demand, direct loans have a more stimulatory effect. Therefore, replacing loan guarantees with direct loans will increase interest rates on government securities, lower interest rates to all other borrowers and generate a higher demand price for capital.