We conducted a recent study in which we surveyed Italian firms in the manufacturing and production services sectors and obtained information on their expectations and plans immediately before and immediately after the coronavirus pandemic outbreak. We tried to answer three questions: (i) How have credit constraints amplified the adverse effects of the pandemic on firms’ expected sales, orders, employment, and investment? (ii) How have firms’ pricing strategies been affected by financial frictions? (iii) What has been the relative importance of supply and demand components of the Covid-19 crisis?
The study assumes that revisions in firms’ expectations between the two surveys were entirely due to the Covid-19 pandemic. The data suggest that the Covid-19 outbreak reduced expected sales growth and increased the prices that firms expected to charge. These changes were larger for firms that were financially constrained, were classified as non-essential, or were located in provinces more severely hit by the pandemic, as measured by the number of Covid-19 related deaths. Together these changes led to a slight increase in the expected aggregate inflation rate, as measured by the producer price index.
Financial frictions amplified the effects of the Covid-19 pandemic, since credit-constrained firms have more pessimistic expectations in terms of sales and orders, and plan to reduce employment and investment relatively more compared to unconstrained firms. The evidence supports the view that credit-constrained firms plan to increase prices relatively more, consistent with a markup strategy aimed at boosting internal sources of funds, even at the cost of future losses of a customer base. In addition, firms in areas that were more severely affected by the Covid-19 epidemic are more pessimistic and plan to increase prices by more. Moreover, firms that are subjected to more stringent restrictions, because their work is deemed to be non-essential, have more pessimistic sales and order expectations and plan larger decreases in both employment and investment. The moderate increase in aggregate expected prices, coupled with a fall in sales, orders, and investment, suggests that the supply components of the Covid-19 generated shocks are somewhat larger than the demand components.
The analysis emphasizes the importance of financial frictions and of liquidity in the formation of firms’ expectations and plans. This underscores the importance of programs by governments and central banks designed to provide firms with access to funding. The presence of supply and demand components in the shocks generated by Covid-19 suggests a role for policies designed to support both demand and supply.
© Pierluigi Balduzzi, Emanuele Brancati, Marco Brianti, and Fabio Schiantarelli
Pierluigi Balduzzi is professor of finance at Boston College, USA
Emanuele Brancati is assistant professor of economics at the University of Rome—La Sapienza, Italy
Marco Brianti is a PhD student in economics at Boston College, USA
Fabio Schiantarelli is professor of economics at Boston College, USA, and a Research Fellow of IZA
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