COVID-19 and SME Failures

Pierre-Olivier Gourinchas, Sebnem Kalemli-Ozcan, Veronika Penciakova and Nick Sander ()
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Veronika Penciakova: https://www.atlantafed.org/research/economists/penciakova-veronika.aspx

No 2020-21, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: We estimate the impact of the COVID-19 crisis on business failures among small and medium-size enterprises (SMEs) in seventeen countries using a large representative firm-level database. We use a simple model of firm cost minimization and measure each firm’s liquidity shortfall during and after COVID-19. Our framework allows for a rich combination of sectoral and aggregate supply, productivity, and demand shocks. Accommodation and food services; arts, entertainment, and recreation; education; and other services are among the sectors most affected. The SME jobs at risk due to business failures related to COVID-19 represent 3.1 percent of private sector employment. Despite the large impact on business failures and employment, we estimate only moderate effects on the financial sector: the share of nonperforming loans on bank balance sheets would increase by up to 11 percentage points, representing 0.3 percent of banks’ assets, and would result in a 0.75 percentage point decline in the common equity tier 1 capital ratio. We also evaluate the cost and effectiveness of various policy interventions. The fiscal cost of an intervention that narrowly targets at-risk firms can be modest (0.54 percent of gross domestic product). However, at a similar level of effectiveness, nontargeted subsidies can be substantially more expensive (1.82 percent of gross domestic product). Our results have important implications for the severity of the COVID-19 recession, the design of policies, and the speed of the recovery.

Keywords: COVID-19; business failures; liquidity; small business (search for similar items in EconPapers)
JEL-codes: D2 E65 G33 (search for similar items in EconPapers)
Pages: 55
Date: 2020-12-03
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-mac and nep-sbm
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Citations: View citations in EconPapers (37)

Published in 2020

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Working Paper: COVID-19 and SME Failures (2020)
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DOI: 10.29338/wp2020-21

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