"Short-time Work Revisited: Optimal Macroeconomic Stabilisation in Liquidity Crises"

Both COVID-19 and the Russian invasion of Ukraine had severe negative consequences for firms' profitability around the world, putting whole industries on the brink of collapse. For policy makers, these shocks raised concerns that temporary cash-shortages could lead to excessive layoffs and bankruptcies. I study how occasionally binding cash-flow constraints distort the way economies respond to adverse shocks and characterise optimal policy in a dynamic general equilibrium model with labour search-and-matching. The model features firm-heterogeneity and an intensive (work hours) and extensive (job creation and destruction) margin of adjustment. In liquidity crises, too much adjustment happens along the extensive margin, while the intensive margin is underused. I provide closed-form solutions for the optimal short-time work subsidy which achieves the constrained efficient allocation and consists of a time-varying eligibility criterion and subsidy rate. STW policies increase employment and can have quantitatively significant welfare benefits. However, if too generous, STW creates moral hazard and reduces economic activity and welfare