Transfers vs Credit Policy: Macroeconomic Policy Trade-Offs During Covid-19

29 Pages Posted: 12 May 2020 Last revised: 5 Feb 2021

See all articles by Saki Bigio

Saki Bigio

University of California, Los Angeles (UCLA) - Department of Economics

Mengbo Zhang

University of California, Los Angeles (UCLA) - Department of Economics

Eduardo Zilberman

Department of Economics, PUC-Rio

Date Written: May 2020

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.

Suggested Citation

Bigio, Saki and Zhang, Mengbo and Zilberman, Eduardo, Transfers vs Credit Policy: Macroeconomic Policy Trade-Offs During Covid-19 (May 2020). NBER Working Paper No. w27118, Available at SSRN: https://ssrn.com/abstract=3597850

Saki Bigio (Contact Author)

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Mengbo Zhang

University of California, Los Angeles (UCLA) - Department of Economics ( email )

8283 Bunche Hall
Los Angeles, CA 90095-1477
United States

Eduardo Zilberman

Department of Economics, PUC-Rio ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22453
Brazil

HOME PAGE: http://https://sites.google.com/site/eduardozilberman/

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