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The Official Sector’s Response to the Coronavirus Pandemic and Moral Hazard

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Abstract

Any time the Federal Reserve or the official sector more broadly provides support to the economy during a crisis, the intervention raises concerns related to moral hazard. Moral hazard can occur when market participants do not bear the negative consequences of the risks they take. This lack of consequences can encourage even greater risks, due to the expectation of future government help. In this post, we consider the potential for moral hazard stemming from the official sector’s response to the coronavirus pandemic and explain why moral hazard concerns were likely more severe in 2008.

Suggested Citation

  • Anna Kovner & Antoine Martin, 2020. "The Official Sector’s Response to the Coronavirus Pandemic and Moral Hazard," Liberty Street Economics 20200924, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:88767
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    Cited by:

    1. Michael J. Fleming & Haoyang Liu & Rich Podjasek & Jake Schurmeier, 2022. "The Federal Reserve’s Market Functioning Purchases," Economic Policy Review, Federal Reserve Bank of New York, vol. 28(1), pages 210-241, July.

    More about this item

    Keywords

    pandemic; COVID-19; moral hazard;
    All these keywords.

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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