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Transfers vs Credit Policy: Macroeconomic Policy Trade-offs during Covid-19

Saki Bigio, Mengbo Zhang and Eduardo Zilberman

No 27118, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The Covid-19 crisis has lead to a reduction in the demand and supply of sectors that produce goods that need social interaction to be produced or consumed. We interpret the Covid-19 shock as a shock that reduces utility stemming from “social” goods in a two-sector economy with incomplete markets. We compare the advantages of lump-sum transfers versus a credit policy. For the same path of government debt, transfers are preferable when debt limits are tight, whereas credit policy is preferable when they are slack. A credit policy has the advantage of targeting fiscal resources toward agents that matter most for stabilizing demand. We illustrate this result with a calibrated model. We discuss various shortcomings and possible extensions to the model.

JEL-codes: E32 E44 E62 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG
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