Working Paper: CEPR ID: DP14529
Authors: Luca Fornaro; Martin Wolf
Abstract: We provide a simple model to understand some macroeconomic implications of the coronavirus epidemic. We focus on a scenario in which the Covid-19 outbreak causes a persistent supply disruption, potentially extending beyond the end of the epidemic. We show that the spread of the virus might generate a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits. Aggressive policies to support investment can reverse the supply-demand doom loop and jumpstart the economy out of stagnation traps.
Keywords: coronavirus; pandemic; COVID-19; supply-demand doom loop; stagnation traps; monetary policy; fiscal policy; productivity growth; hysteresis
JEL Codes: E24; E32; E52; E62; F43; O42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Spread of the virus (F65) | Depress global demand (F69) |
| Depress global demand (F69) | Involuntary unemployment (J64) |
| Lower productivity growth (O49) | Decreased aggregate demand (E20) |
| Supply shock (Q31) | Depress demand (D12) |
| Depress demand (D12) | Lowers investment (G31) |
| Lowers investment (G31) | Future productivity (O49) |
| Pessimistic animal spirits (E32) | Stagnation traps (D50) |
| Stagnation traps (D50) | Expectations of weak growth (E66) |
| Aggressive fiscal policies (E62) | Counteract effects (C92) |