Financing Firms in Hibernation during the COVID-19 Pandemic: Article Review

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Table of Contents

Introduction
Overview
Recommendations
Conclusion

Introduction

The COVID-19 pandemic affected the global economy just as much as the public health domain. However, most economies were able to recover significantly due to efficient policy responses. The article Financing Firms in Hibernation during the COVID-19 Pandemic by Didier, Huneerus, Larrain and Schmukler from 2021 discusses optimal policy choices for business security during the pandemic. The authors introduce the concept of firm hibernation, which refers to minimal spending required to sustain a firm for a period of mass lockdown. This idea is proposed in hopes of saving the relationships with the firms, allowing for a quicker economic rebound once the pandemic is resolved. Along with highlighting the importance of economic relationships, the authors also talk about the governments function as a lender and last-resort loss absorber. The text poses certain implications regarding the preferable course of policy action during periods of external systemic shock.

Overview

Firstly, the unique features of the global pandemic, as opposed to other major economic crises, are covered. Global economic disruptions began in the financial sector before the COVID-19 crisis. Conversely, the coronavirus pandemic was an external system shock that occurred outside the economy. The virus can be distinguished from other disruptive factors by a high degree of uncertainty. The recovery from the initial disturbance in the economic sphere depends entirely on the viruss elimination. Still, even if the disease is largely eliminated, the time required for the cultural rebound is also unknown. Additionally, there have been significant changes in consumer spending and investment patterns as a result of the COVID-19 crisis. Moreover, the viruss activity may have long-lasting negative economic effects. All of the above suggests that in order to fight the fallout of the pandemic, policymakers must account for the uncertain nature of the situation and allocate resources with caution.

Recommendations

A potential response to the limitations of policy inaction during the pandemic is firm hibernation. The value of hibernation lies in the fact that it allows businesses to take on as little debt as possible to stay afloat during the pandemic and when the economy recovers and accrued loans need to be serviced. Furthermore, lending monetary resources can prevent long-term economic scarring by saving industry relationships and avoiding the emergence of zombie firms, groups that are out of business with existing outstanding debts.

Business relationships with other companies and customers are invaluable assets for economic sustainability. These connections deteriorate as a result of viable businesses being forced into bankruptcy, making recovery virtually impossible. A brief shock that irreparably damages a large number of relationships can have lasting negative effects on the economy and slow its recovery. The need for the aforementioned hibernation is stark in light of the severity of economic degradation.

Conclusion

In conclusion, the article discusses optimal responses to the COVID-19 economic crisis. Among the topics evaluated are the difficulties of dealing with exogenous health disruptions that affect the financial domain and the appropriate approaches to resource allocation in such instances. Judging by the findings of the authors, one can argue in favor of firm hibernation, a procedure that would sustain a business during reduced operation periods and prevent viable firms from going bankrupt. The efficacy of this approach is yet to be determined; however, the preliminary assessment of the viruss nature, creditor functions, and relationship value predicts a solid solution to the economic crisis.

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Financing Firms in Hibernation during the COVID-19 Pandemic: Article Review

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