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Asymmetric effects across sectors are the distinctive features of the Covid-19 shock. An Epidemiological-Industry Dynamic model with heterogeneous firms and endogenous firms dynamics mimics the deep recession suffered by sectors characterized by high exposure, the reallocation of entry and exit opportunities across sectors, and the dynamics of aggregate productivity during the first wave of the pandemic. The cleansing effect induced by the Covid-19 crisis is sector-specific. Monetary policy and sticky wages are central ingredients to capture reallocation effects. Social distancing, by smoothing out cleansing in the social sector, slows down the reallocation process and prolongs the recession, but saves lives.

We study the effects on economic activity of a pure temporary change in government debt and the relationship between the debt multiplier and the level of debt in an overlapping generations framework. The debt multiplier is positive but quite small during normal times while it is much larger during crises. Moreover, it increases with the steady state level of debt. Hence, the call for fiscal consolidation during recessions seems ill-advised. Finally, a rise in the steady state debt-to-GDP level increases the steady state real interest rate providing more room for manoeuvre to monetary policy to fight deflationary shocks.