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Liquidity shortfalls during the COVID-19 outbreak: Assessment and policy responses

Author

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  • Lilas Demmou
  • Guido Franco
  • Sara Calligaris
  • Dennis Dlugosch

Abstract

The paper investigates the financial vulnerability of non-financial firms during the Coronavirus (COVID-19) epidemic crisis. In particular, it evaluates the extent to which firms may run into a liquidity crisis following the COVID-19 outbreak and the impact of stylised policy measures to reduce the risks and depth of such crisis. The analysis relies on three ingredients: a simple accounting model, a large dataset reporting firms’ balance sheets for 14 countries and granular data on the magnitude of the shock measuring the impact of confinement measures on economic activity (notably depending on the capacity of each sector to operate by teleworking). Results suggest that, without any policy intervention, up to 38% of firms would face liquidity shortfalls after 10 months since the implementation of confinement measures. Comparing the impact of different policies (tax deferral, debt moratorium and support to wage payments), the analysis shows that government support to relieve wage bills is the most effective tool to reduce liquidity shortages, followed by debt moratorium policies. Finally, the paper zooms into labour market policies and compares the costefficiency of short-term work and wage subsidies schemes, highlighting how their relative efficiency depends on their design.

Suggested Citation

  • Lilas Demmou & Guido Franco & Sara Calligaris & Dennis Dlugosch, 2021. "Liquidity shortfalls during the COVID-19 outbreak: Assessment and policy responses," OECD Economics Department Working Papers 1647, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1647-en
    DOI: 10.1787/581dba7f-en
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    References listed on IDEAS

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    1. Sørensen, Bent E & Kalemli-Özcan, Sebnem & Volosovych, Vadym & Villegas-Sanchez, Carolina & Yesiltas, Sevcan, 2015. "How to construct nationally representative firm level data from the ORBIS global database," CEPR Discussion Papers 10829, C.E.P.R. Discussion Papers.
    2. Mattia Guerini & Lionel Nesta & Xavier Ragot & Stefano Schiavo, 2020. "Firm liquidity and solvency under the Covid-19 lockdown in France," SciencePo Working papers Main hal-03059232, HAL.
    3. Mattia Guerini & Lionel Nesta & Xavier Ragot & Stefano Schiavo, 2020. "Firm liquidity and solvency under the Covid-19 lockdown in France," Post-Print hal-03403022, HAL.
    4. Sebnem Kalemli-Ozcan & Bent Sorensen & Carolina Villegas-Sanchez & Vadym Volosovych & Sevcan Yesiltas, 2015. "How to Construct Nationally Representative Firm Level Data from the Orbis Global Database: New Facts and Aggregate Implications," NBER Working Papers 21558, National Bureau of Economic Research, Inc.
    5. repec:hal:spmain:info:hdl:2441/a8bbt5m569depe1larqkd498n is not listed on IDEAS
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    Citations

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    Cited by:

    1. David R. Agrawal & Aline Bütikofer, 2022. "Public finance in the era of the COVID-19 crisis," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(6), pages 1349-1372, December.
    2. Harasztosi, Péter & Maurin, Laurent & Pál, Rozália & Revoltella, Debora & van der Wielen, Wouter, 2022. "Firm-level policy support during the crisis: So far, so good?," International Economics, Elsevier, vol. 171(C), pages 30-48.
    3. Xavier Ragot, 2022. "Comment – Public Support to Companies in Times of Crisis: The Value of Microsimulations based on Company Data," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 532-33, pages 63-69.
    4. Tommaso Ferraresi & Leonardo Ghezzi & Fabio Vanni & Alessandro Caiani & Mattia Guerini & Francesco Lamperti & Severin Reissl & Giorgio Fagiolo & Mauro Napoletano & Andrea Roventini, 2021. "On the economic and health impact of the COVID-19 shock on Italian regions: A value chain approach," LEM Papers Series 2021/10, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    5. Lalinsky, Tibor & Meriküll, Jaanika & Lopez-Garcia, Paloma, 2024. "Productivity-enhancing reallocation during the Covid-19 pandemic," Working Paper Series 2947, European Central Bank.
    6. repec:zbw:bofrdp:2022_001 is not listed on IDEAS
    7. Sarah Guillou & Karsten Mau & Tania Treibich, 2023. "Firms’ financial vulnerabilities during COVID-19: Was the French support package too generous ?," SciencePo Working papers Main hal-03981175, HAL.
    8. Bighelli, Tommaso & Lalinsky, Tibor & Vanhala, Juuso, 2023. "Cross-country evidence on the allocation of COVID-19 government subsidies and consequences for productivity," Journal of the Japanese and International Economies, Elsevier, vol. 68(C).
    9. Willem Vanlaer & Mattia Picarelli & Wim Marneffe, 2021. "Debt and Private Investment: Does the EU Suffer from a Debt Overhang?," Open Economies Review, Springer, vol. 32(4), pages 789-820, September.
    10. Bighelli, Tommaso & Lalinsky, Tibor & Vanhala, Juuso, 2022. "Covid-19 pandemic, state aid and firm productivity," Bank of Finland Research Discussion Papers 1/2022, Bank of Finland.
    11. Bighelli, Tommaso & Lalinsky, Tibor & Vanhala, Juuso, 2022. "Covid-19 pandemic, state aid and firm productivity," Bank of Finland Research Discussion Papers 1/2022, Bank of Finland.
    12. Benjamin Bureau & Anne Duquerroy & Frédéric Vinas & Andrew EllulEditor, 2024. "Activity Shocks and Corporate Liquidity: the Role of Trade Credit," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 13(3), pages 668-711.
    13. Archanskaia, Elizaveta & Canton, Erik & Hobza, Alexandr & Nikolov, Plamen & Simons, Wouter, 2023. "The asymmetric impact of COVID-19: A novel approach to quantifying financial distress across industries," European Economic Review, Elsevier, vol. 158(C).

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    More about this item

    Keywords

    cash; COVID-19; job retention; liquidity;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • J38 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Public Policy
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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