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Credit and Liquidity Policies during Large Crises


Abstract: We compare firms’ financials during the Great Financial Crisis (GFC) and COVID-19. While the two crises featured similar increases in credit spreads, debt and liquid assets decreased during the GFC but increased during COVID-19. In the cross-section, leverage was the primary determinant of credit spreads and investment during the GFC, but liquidity was more important during COVID-19. We augment a quantitative model of firm capital structure with a motive to hold liquid assets. The GFC resembled a combination of productivity and financial shocks, while COVID-19 also featured liquidity shocks. We study the state-dependent effects of credit and liquidity policies.

Keywords: credit spreads; liquidity; Great Recession; COVID-19;

JEL Classification: E6; G01; H0;

https://doi.org/10.20955/wp.2020.035

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Provider: Federal Reserve Bank of St. Louis

Part of Series: Working Papers

Publication Date: 2022-09-21

Number: 2020-035

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