Can the Covid Bailouts Save the Economy?

Vadim Elenev, Tim Landvoigt and Stijn Van Nieuwerburgh

No 27207, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The covid-19 crisis has led to a sharp deterioration in firm and bank balance sheets. The government has responded with a massive intervention in corporate credit markets. We study equilibrium dynamics of macroeconomic quantities and prices, and how they are affected by government policy. The interventions prevent a much deeper crisis by reducing corporate bankruptcies by about half and short-circuiting the doom loop between corporate and financial sector fragility. The additional fiscal cost is zero since program spending replaces what would otherwise have been spent on intermediary bailouts. The model predicts rising interest rates on government debt and slow debt pay-down. We analyze an alternative intervention that targets aid to firms at risk of bankruptcy. While this policy prevents more bankruptcies and has lower fiscal cost, it only enjoys marginally higher welfare. Finally, we study longer-run consequences for firm leverage and intermediary health when pandemics become the new normal.

JEL-codes: E3 E4 E44 E6 G1 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP CF EFG IFM ME PE
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Citations: View citations in EconPapers (55)

Published as Vadim Elenev & Tim Landvoigt & Stijn Van Nieuwerburgh, 2022. "Can the covid bailouts save the economy?," Economic Policy, vol 37(110), pages 277-330.

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Journal Article: Can the covid bailouts save the economy? (2022)
Working Paper: Can the Covid Bailouts Save the Economy? (2020)
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