Bounded Support: Success and Limitations of Liquidity Support During Times of Crisis

78 Pages Posted: 30 Dec 2022 Last revised: 1 Mar 2024

See all articles by John Lynch

John Lynch

Hofstra University - Department of Finance

Richard Ogden

Rowan University - Accounting & Finance

Date Written: December 29, 2022

Abstract

Our paper sheds light on the complexity of liquidity injection programs by showing unintended consequences that arise when firm heterogeneity is overlooked. Utilizing firm-level data from the Paycheck Protection Program, we find government lending effectively reduced closures, particularly if received during the first two weeks. However, we find significant heterogeneity in the effectiveness of funds, resulting from broad-brush eligibility guidelines and differences in how firms process information. The implementation relied on the banking system, which exacerbated the distributional effects by favoring firms with stronger customer capital. Our findings highlight the importance of thoughtful liquidity distribution design to maximize its benefits.

Keywords: Fiscal Policy, Liquidity Crisis, Relationship Lending, Intermediaries, Small and Medium-Sized Enterprises (SMEs), Local Markets, Distributional Effects

JEL Classification: E62, G28, G30, H12, H23

Suggested Citation

Lynch, John and Ogden, Richard, Bounded Support: Success and Limitations of Liquidity Support During Times of Crisis (December 29, 2022). Available at SSRN: https://ssrn.com/abstract=4314686 or http://dx.doi.org/10.2139/ssrn.4314686

John Lynch (Contact Author)

Hofstra University - Department of Finance ( email )

Hempstead, NY 11550
United States

HOME PAGE: http://https://sites.google.com/view/john-lynch/

Richard Ogden

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

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