Working Paper: NBER ID: w27118
Authors: Saki Bigio; Mengbo Zhang; Eduardo Zilberman
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.
Keywords: COVID-19; macroeconomic policy; transfers; credit policy
JEL Codes: E32; E44; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government policy responses (lumpsum transfers vs. credit policies) (H81) | macroeconomic outcomes (demand stabilization) (E63) |
| debt limits tight (H63) | lumpsum transfers preferable for stabilizing demand (F16) |
| debt limits slack (H63) | credit policies more effective (H81) |
| natural borrowing limit (H74) | lumpsum transfers become neutral (H23) |
| zero borrowing limit (E62) | credit policies ineffective (H81) |
| tight borrowing limits (F34) | amplify recessions (E32) |
| tight borrowing limits (F34) | restrict credit subsidy use (H81) |