Discussion Paper Details

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Title: Can the Covid Bailouts Save the Economy?

Author(s): Vadim Elenev, Tim Landvoigt and Stijn van Nieuwerburgh

Publication Date: May 2020

Keyword(s): bailout, COVID-19, credit crisis and Financial Intermediation

Programme Area(s): Financial Economics, Macroeconomics and Growth and Monetary Economics and Fluctuations

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 intervention in the corporate debt markets. We find that the policies should be highly effective at preventing a much deeper crisis by reducing corporate bankruptcies by about half, and short-circuiting the doom loop between corporate and financial sector fragility. The fiscal costs are high and will lead to rising interest rates on government debt. We propose a more effective intervention with lower fiscal cost. Finally, we study longer-run consequences for firm leverage and intermediary health when pandemics become the new normal.

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Bibliographic Reference

Elenev, V, Landvoigt, T and van Nieuwerburgh, S. 2020. 'Can the Covid Bailouts Save the Economy?'. London, Centre for Economic Policy Research.