1 option
Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? / Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván Werning.
- Format:
- Book
- Author/Creator:
- Guerrieri, Veronica.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w26918.
- NBER working paper series no. w26918
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Macroeconomic Implications of COVID-19
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2020.
- Summary:
- We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic--shutdowns, layoffs, and firm exits--may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.
- Notes:
- Print version record
- April 2020.
The Penn Libraries is committed to describing library materials using current, accurate, and responsible language. If you discover outdated or inaccurate language, please fill out this feedback form to report it and suggest alternative language.