Crises have cleansing effects: Low-quality firms face greater financial shortfalls and invest less than high-quality firms. Public liquidity support preserves the overall production capacity. However, by dampening the cleansing effects, it distorts the quality distribution and reduces the total...

Policymakers in Malaysia should weigh the distributional consequences of policy actions. They should also consider measures to alleviate the disproportionate impact that market imperfections have on small and medium-size industries