Liquidity Provision During a Pandemic

28 Pages Posted: 8 May 2020

See all articles by Charles Kahn

Charles Kahn

University of Illinois at Urbana-Champaign

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2020

Abstract

We examine how public liquidity should be distributed to firms when immediate production entails externalities, such as by spreading a virus. Direct provision of liquidity can address externalities, but traditional distribution of liquidity (through banks) has informational advantages. We show that which mode is preferred is determined by the variance (but not the level) of firm characteristics in the economy. Traditional provision is always part of the optimal policy when liquidity modes can be combined, and involves promising low interest rates for when the pandemic is over in order to incentivize temporary production shutdowns at firms.

Keywords: banks, Covid-10, mothballing, public liquidity

JEL Classification: G20, G28, G31, I18

Suggested Citation

Kahn, Charles and Wagner, Wolf, Liquidity Provision During a Pandemic (May 2020). CEPR Discussion Paper No. DP14701. Available at SSRN: https://ssrn.com/abstract=3594336

Charles Kahn (Contact Author)

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

Wolf Wagner

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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