Liquidity provision during a pandemic

Charles M. Kahn; Wolf Wagner

doi:10.1016/j.jbankfin.2021.106152

Liquidity provision during a pandemic

Charles M. Kahn
, Wolf Wagner^*

^*Corresponding author for this work

Department of Finance

University of Illinois at Urbana-Champaign

Research output: Contribution to journal › Article › Academic › peer-review

12 Citations (Scopus)

269 Downloads (Pure)

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.

Original language	English
Article number	106152
Pages (from-to)	10-33
Number of pages	23
Journal	Journal of Banking and Finance
Volume	133
Early online date	10 Nov 2021
DOIs	https://doi.org/10.1016/j.jbankfin.2021.106152
Publication status	Published - 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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Liquidity provision during a pandemiFinal published version, 563 KBLicence: CC BY

Cite this

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title = "Liquidity provision during a pandemic",

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.",

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Liquidity provision during a pandemic

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