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Uncertainty, government bailouts and the macro economy

Year: 2025

Type: article

Abstract: The COVID-19 pandemic and ongoing geopolitical risks have led to a massive spike in uncertainty. In this paper, we examine the impacts of economic uncertainties on macroeconomic variables and the optimal policy reactions to the rising uncertainty in a two-sector Dynamic Stochastic General Equilibrium (DSGE) model with Chinese characteristics. With the assumption that the government provides bailouts for bank loans to state-owned enterprises (SOEs) and financial market friction problem is more severe for private-owned enterprises (POEs), the uncertainty shock induces an inefficient capital reallocation from POEs to SOEs. Our results demonstrate that reducing bailouts to SOEs and granting more bailouts to POEs is a welfare improvement when uncertainty increases.

Source: International Review of Economics & Finance

DOI: 10.1016/j.iref.2025.104668

Authors: Shen Guo, Alice Y. Ouyang

Institution: Central University of Finance and Economics

Language: English

Topic: Monetary Policy and Economic Impact

Subfield: General Economics, Econometrics and Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: gold

Estimated APC paid: $1,930