COVID-19 Crisis, Bankruptcy Risk, and Transition Dynamics

41 Pages Posted: 13 Jan 2021

See all articles by Sujan Lamichhane

Sujan Lamichhane

Johns Hopkins University - Carey Business School

Date Written: September 2020

Abstract

The COVID-19 pandemic has pushed many firms to the edge of bankruptcy and revived concerns of a prolonged/deep recession. The government has introduced various policies to mitigate its economic impact. We build a continuous time heterogeneous agent model to study (i) corporate bankruptcy risks, and (ii) the transition dynamics of the economy. This general framework is applied for understanding the implications of the COVID-19 economic crisis. The higher the bankruptcy rate, the faster the transition towards the new long run steady state. Transition speed decreases as the mass of firms in the upper tail of the net worth distribution increases. While broad fiscal policies are relatively more effective in reducing bankruptcy risks, monetary policies of providing market liquidity are more effective in generating faster transition dynamics.

Keywords: Bankruptcy risk, transition dynamics, COVID-19 crisis, market liquidity, fiscal/monetary policy, heterogeneous agent, net worth distribution

JEL Classification: C60, E44, E50, E60, G32, G33

Suggested Citation

Lamichhane, Sujan, COVID-19 Crisis, Bankruptcy Risk, and Transition Dynamics (September 2020). Available at SSRN: https://ssrn.com/abstract=3762494 or http://dx.doi.org/10.2139/ssrn.3762494

Sujan Lamichhane (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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