Abstract
Financial crises are characterized by depressed asset prices, tight financial constraints, and misallocation of resources. Standard policy responses–such as asset purchases and low interest rates–are generally intended to alleviate these symptoms. This paper distinguishes between two types of crises that appear similar but differ fundamentally in their underlying mechanisms: fire-sale crises, where productive firms are forced to sell assets; and demand-freeze crises, where productive firms are unable to purchase assets. While both lead to similar observable outcomes, they have contrasting general equilibrium effects and may call for different policy interventions. Notably, conventional policies can be counterproductive in demand-freeze crises, as they may exacerbate financial constraints and further distort resource allocation. Empirical evidence on the pattern of capital reallocation among U.S. firms suggests that demand-freeze crises are, in fact, more common.
More about Priit Jeenas
Priit Jeenas is an Assistant Professor of Economics at Universitat Pompeu Fabra, an Associate Researcher at CREI, and an Affiliated Professor at the Barcelona School of Economics. He received his PhD in Economics from New York University in 2019. His research focuses on monetary and financial economics, firm heterogeneity, and the allocation of resources across firms. His work combines quantitative macroeconomic models with empirical analysis using firm-level data. On the empirical side, he employs panel regressions and other microeconometric methods, drawing on datasets such as U.S. firm-level panel data as well as administrative, credit-register, and public-procurement data. He uses these approaches to study firms’ investment, financing, access to credit, and their responses to monetary policy and other economic shocks.