Can the Covid Bailouts Save the Economy?

By Vadim Elenev, T. Landvoigt, Stijn Van Nieuwerburgh. Social Science Research Network, 2020

118 citations recorded by the source corpus.

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.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/d352e0524b8720de7aab45083fb23effaf758e36

Citations in the corpus

• A literature review of the economics of COVID‐19 (2020, unknown): “These policies can break the cycle of negative feedback loops between corporate defaults and potential insolvency of financial intermediaries, which could culminate in a meltdown in financial markets (Elenev et al., 2020).”
• Did the paycheck protection program hit the target? (2020, unknown): “A motivation for using the banking system 4 Other studies take a more theoretical approach ( Elenev et al., 2020; Joaquim and Netto, 2020; Barrios et al., 2020 ), or study specific aspects of the PPP, such as the role of Fintechs, bank lending relationships, and firm size in the allocation of funds…”