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Liquidity Shortfalls during the COVID 19 Outbreak: Assessment and Policy Responses

Author

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

Abstract

[eng] The paper investigates the impact of stylised policy measures on the financial vulnerability of non-financial firms during the COVID-19 pandemic crisis. It evaluates the extent to which firms run into a liquidity crisis following the COVID-19 outbreak and the impact of policies to reduce the risks of such a crisis. The analysis relies on: an accounting model, a large dataset reporting firms’ balance sheets for 14 countries and data on the magnitude of the shock at the sector level. Results suggest that, without any policy intervention, up to 38% of firms were to face liquidity shortfalls after ten months since the implementation of confinement. Comparing the impact of different policies, the analysis shows that government support to relieve wage bills is the most effective tool, followed by debt moratorium policies. Finally, the paper zooms into labour market policies and compares the cost-efficiency 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, 2022. "Liquidity Shortfalls during the COVID 19 Outbreak: Assessment and Policy Responses," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 532-33, pages 47-61.
    • Handle: RePEc:nse:ecosta:ecostat_2022_532_3
    DOI: https//doi.org/10.24187/ecostat.2022.532.2070
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    Cited by:

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    3. 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).
    4. Péter Harasztosi & Laurent Maurin & Rozália Pál & Debora Revoltella & Wouter van der Wielen, 2022. "Firm-level policy support during the crisis: So far, so good?," International Economics, CEPII research center, issue 171, pages 30-48.
    5. Huneeus, Federico & Kaboski, Joseph P. & Larrain, Mauricio & Schmukler, Sergio & Vera, Mario, 2024. "Crisis Credit, Employment Protection, Indebtedness, and Risk," Policy Research Working Paper Series 10958, The World Bank.
    6. 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.
    7. Dongli Cao & Safdar Husain Tahir & Syed Maisam Raza Rizvi & Khuda Bakhsh Khan, 2024. "Exploring the influence of women’s leadership and corporate governance on operational liquidity: The glass cliff effect," PLOS ONE, Public Library of Science, vol. 19(5), pages 1-18, May.
    8. 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.
    9. 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.
    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. Sarah Guillou & Karsten Mau & Tania Treibich, 2023. "Firms’ financial vulnerabilities during COVID-19: Was the French support package too generous ?," Working Papers hal-03981175, HAL.
    12. 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.
    13. Lalinsky, Tibor & Meriküll, Jaanika & Lopez-Garcia, Paloma, 2024. "Productivity-enhancing reallocation during the Covid-19 pandemic," Working Paper Series 2947, European Central Bank.
    14. Srecko Devjak, 2023. "Corporate Liquidity in Coronacrisis: Experience of Serbian Economy," Central European Business Review, Prague University of Economics and Business, vol. 2023(1), pages 1-20.
    15. 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.
    16. Annalisa Ferrando & Judit Rariga, 2024. "Firms’ financing conditions before and after the COVID-19 pandemic: a survey-based analysis," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 51(2), pages 239-264, June.
    17. Gross, Christian & Kuntz, Laura-Chloé & Niederauer, Simon & Strobel, Lena & Zwanzger, Joachim, 2025. "Climate stress test for the German banking sector: Impact of the green transition on corporate loan portfolios," Discussion Papers 11/2025, Deutsche Bundesbank.
    18. 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).
    19. Ekin Ayse Özsuca, 2024. "Agribusiness resilience during the COVID-19 pandemic: The role of credit constraints," Agricultural Economics, Czech Academy of Agricultural Sciences, vol. 70(12), pages 591-605.
    20. Niall O’Donnell & Darren Shannon & Barry Sheehan, 2024. "The impact of monetary policy interventions on banking sector stocks: an empirical investigation of the COVID-19 crisis," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-41, December.
    21. Kamal, Md Mostafa & Roca, Eduardo & Li, Bin & Lin, Chen & Reza, Rajibur, 2025. "Price contagion and risk spillover in the global commodities market: COVID-19 pandemic vs. global financial crisis," Resources Policy, Elsevier, vol. 103(C).

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    More about this item

    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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