Liquidity provision during a pandemic

Charles Kahn and Wolf Wagner

Journal of Banking & Finance, 2021, vol. 133, issue C

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: Public liquidity; Banks; Covid-19; Mothballing; JEL G28; G20; G31; I18 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Working Paper: Liquidity provision during a pandemic (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:133:y:2021:i:c:s0378426621001102

DOI: 10.1016/j.jbankfin.2021.106152

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