Access to Liquidity in a Financial Crisis

We study how liquidity constraints affect entrepreneurial activity using a temporary lending program introduced in Sweden at the height of the financial crisis. Firms could suspend payment of all labor-related taxes and fees, but any suspended payments were considered a fixed rate loan from the Swedish government. The structure of the program made it relatively more beneficial for firms with high ex ante labor expenses. Exploiting this aspect of the program to address endogenous selection into the program, we find that the increase in liquidity allowed participating firms to increase both net debt levels and rates of real investment spending. While these results highlight the existence and real impact of binding credit constraints in an important subset of entrepreneurial firms, our estimates suggest that fewer than 10 percent of economy-wide firms needed liquidity, even at the height of the crisis.