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Firm-bank linkages and optimal policies in a lockdown

Author

Listed:
  • Anatoli Segura

    (Banca d’Italia)

  • Alonso Villacorta

    (University of California Santa Cruz)

Abstract

We develop a novel framework featuring loss amplification through firm-bank linkages. We use it to study optimal intervention in a lockdown situation that creates cash shortfalls for firms, which must resort to bank lending. Firms’ increased debt reduces their output due to moral hazard. Banks need safe collateral to raise funds. Without intervention, aggregate risk constrains bank lending, amplifying output losses. Optimal government support provides sufficient aggregate risk insurance, and is implemented through transfers to firms and fairly-priced guarantees on banks’ debt. When aggregate risk is not too large, such guarantees can be financed through a procyclical taxation of firms’ profits.

Suggested Citation

  • Anatoli Segura & Alonso Villacorta, 2021. "Firm-bank linkages and optimal policies in a lockdown," Temi di discussione (Economic working papers) 1343, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1343_21
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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2021/2021-1343/en_tema_1343.pdf
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    References listed on IDEAS

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    Cited by:

    1. Polo, Andrea & Altavilla, Carlo & Ellul, Andrew & Pagano, Marco & Vlassopoulos, Thomas, 2021. "Loan Guarantees, Bank Lending and Credit Risk Reallocation," CEPR Discussion Papers 16727, C.E.P.R. Discussion Papers.

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    More about this item

    Keywords

    Covid-19; cash shortfall; firms' debt; moral hazard; bank equity; aggregate risk; government interventions.;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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