Can Policy Mitigate Liquidity Constraints? Evidence from a Temporary Lending Program

We study the prevalence of credit constraints in the full economy of firms, and the effectiveness of policy aimed at mitigating those constraints. We link liquidity from a unique lending program implemented in Sweden at the height of the financial crisis with significant increases in firm debt levels and real investment spending, highlighting the presence of binding liquidity constraints among participating firms. Liquidity constraints are most pronounced in younger and more leveraged firms, but are limited in scope, affecting fewer than 10% of economy-wide firms. These findings suggest policies targeting transitory liquidity needs might be more effective than policies that broadly subsidize all small firms.