Liquidity provision during a pandemic

Wolf Wagner and Charles Kahn

No 14701, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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-10; Mothballing (search for similar items in EconPapers)
JEL-codes: G20 G28 G31 I18 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (16)

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Journal Article: Liquidity provision during a pandemic (2021)
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