From hibernation to reallocation loan guarantees and their implications for post covid 19 productivity

This paper analyses the role of loan guarantee programmes following the COVID-19 outbreak in alleviating firm distress as well as their broader impacts on productivity via reallocation, relying on a simulation model and econometric estimations. The simulation exercise relies on a simple cash-flow accounting model, a large dataset reporting balance sheets of firms located in 14 countries and granular data on the magnitude of the COVID-19 shock. The findings suggest that i) the COVID-19 shock had the potential to seriously distort market selection; and ii) policy actions corrected up to 30% of the inefficiency of market selection in the short-term, shielding many high productive firms from distress and supporting zombie firms only to a limited extent.