Will coronavirus bailouts save the U.S. economy?

The various coronavirus relief measures announced by the U.S. government and the Federal Reserve since late March will help firms to continue paying employee salaries and stave off bankruptcies. But those efforts could use a better design to maximize their positive impacts on the U.S. economy, according to a recent research paper titled “Can the COVID Bailouts Save the Economy?,” written by finance professors Tim Landvoigt at Wharton, Vadim Elenev at Johns Hopkins University, and Stijn Van Nieuwerburgh at Columbia University.

Sandwich board on a city sidewalk that reads “Sorry we’re closed due to COVID-19”

In their paper, the authors weighed four policy scenarios, including a hypothetical one where the government “does nothing.” They compared the impacts of those policy actions with those of an “idealized model” that could potentially prevent more bankruptcies and has a lower fiscal cost than existing programs.

They also offered an early glimpse of the economy’s contours after the current pandemic dies out. In that scenario, there is an “awakening” to the possibility that pandemics may be recurring events, although with small probability. But once a pandemic arrives, it may last more than one year, they noted.

Landvoigt points out that the paper is focused on the financial sector. It also captures “the feedback from the financial sector to the finances of the firms that are producing real output” like manufacturers of goods or services like restaurants. “When a lot of businesses fail and then banks make losses, the banks cut back on their lending business,” he says. “Then it is hard for businesses to get credit, and this can quickly spiral out of control.”

Read more at Knowledge@Wharton.