The Impact of Economic Freedom on Bank Loan Spreads: Evidence from the Financial Crisis

Abstract

ABSTRACT This paper empirically analyzes the impact of economic freedom on loan spreads from the perspective of borrowing firms. We highlight the role of economic freedom in reducing firms’ borrowing costs during the global financial crisis. Our key prediction is that higher economic freedom leads to a decline in bank loan spreads during the financial crisis. As the ongoing COVID-19 has severely damaged financial markets, our findings contribute to the literature on how to mitigate the adverse economic impact of the pandemic. Finally, our results also show that the implications of all the components of economic freedom vary across different economic regions.