Firm-bank linkages and optimal policies in a lockdown

Anatoli Segura and Alonso Villacorta

No 14838, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a novel framework that features loss amplification through firm-bank linkages. We use it to study optimal intervention in a lockdown that creates cash shortfalls to firms, which must borrow from banks to avoid liquidation. Firms’ increase in debt reduces firms’ output due to moral hazard. Banks need safe collateral to raise funds. Without intervention, aggregate risk constrains bank lending, increasing its cost and amplifying output losses. Optimal government support must provide sufficient aggregate risk insurance, and can be implemented with transfers to firms and fairly-priced guarantees on banks’ debt. Non-priced bank debt guarantees and loan guarantees are suboptimal.

Keywords: Covid-19; Liquidity; Firm's leverage; Financial intermediation; Government interventions (search for similar items in EconPapers)
JEL-codes: G01 G20 G28 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban and nep-fdg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://cepr.org/publications/DP14838 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Firm-bank linkages and optimal policies in a lockdown (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:14838

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP14838

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().