Liquidity provision during a pandemic

Charles M. Kahn, Wolf Wagner*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

7 Citations (Scopus)
35 Downloads (Pure)


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.

Original languageEnglish
Article number106152
Pages (from-to)10-33
Number of pages23
JournalJournal of Banking and Finance
Early online date10 Nov 2021
Publication statusPublished - Dec 2021

Bibliographical note

JELClassification: G28, G20, G31, I18
Funding Information:
We thank participants at the Lenzerheide conference, the 6th FIN-FIRE-Workshop on ?Challenges to Financial Stability? and seminar participants at Cass Business School, Rotterdam School of Management and Erasmus School of Economics, as well as Toni Ahnert (discussant), Javier Suarez, Harald Uhlig, David Martinez-Miera (discussant) and Casper de Vries for comments.

Publisher Copyright:
© 2021 The Author(s)


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