Credit and Liquidity Policies During Large Crises

54 Pages Posted: 14 Oct 2020 Last revised: 30 Sep 2022

See all articles by Mahdi Ebsim

Mahdi Ebsim

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Miguel Faria-e-Castro

Federal Reserve Bank of St. Louis

Julian Kozlowski

Federal Reserve Banks - Federal Reserve Bank of St. Louis

Date Written: October, 2020

Abstract

We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity shocks. We study the state-dependent effects of credit and liquidity policies.

Keywords: credit spreads, liquidity, Great Recession, COVID-19

JEL Classification: E6, G01, H0

Suggested Citation

Ebsim, Mahdi and Faria-e-Castro, Miguel and Kozlowski, Julian, Credit and Liquidity Policies During Large Crises (October, 2020). FRB St. Louis Working Paper No. 2020-35, Available at SSRN: https://ssrn.com/abstract=3710897 or http://dx.doi.org/10.20955/wp.2020.035

Mahdi Ebsim (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Miguel Faria-e-Castro

Federal Reserve Bank of St. Louis ( email )

411 Locust St
Saint Louis, MO 63011
United States

Julian Kozlowski

Federal Reserve Banks - Federal Reserve Bank of St. Louis ( email )

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