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Uncertainty, government bailouts and the macro economy

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  • Guo, Shen
  • Ouyang, Alice Y.

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.

Suggested Citation

  • Guo, Shen & Ouyang, Alice Y., 2025. "Uncertainty, government bailouts and the macro economy," International Review of Economics & Finance, Elsevier, vol. 104(C).
    • Handle: RePEc:eee:reveco:v:104:y:2025:i:c:s1059056025008317
    DOI: 10.1016/j.iref.2025.104668
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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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