Transfers vs Credit Policy: Macroeconomic Policy Trade-offs during Covid-19
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.
We are thankful to Andy Atkeson, Pierre-Olivier Weill, Harald Uhlig, and seminar participants at the San Francisco Fed for valuable comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. Mengbo Zhang thanks the State Scholarship Fund of China Scholarship Council for financial support.