Frost and Fire: A Tale of Two Crises

• Authors: Vladimir Asriyan, Priit Jeenas and Alberto Martin
• BSE Working Paper: 1567 | March 2026
• Keywords: financial crises, financial frictions, capital reallocation, demand freezes, fire sales, asset purchases, monetary loosening, credit easing, cleansing effects
• JEL codes: E22, E44, E60, D53, G01, G18

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.