Credit and Liquidity Policies during Large Crises

Mahdi Ebsim, Miguel Faria-e-Castro and Julian Kozlowski

No 2020-035, Working Papers from Federal Reserve Bank of St. Louis

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 real 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 (search for similar items in EconPapers)
JEL-codes: E6 G2 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2020-10-09, Revised 2024-02-22
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (4)

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DOI: 10.20955/wp.2020.035

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