Working Paper: CEPR ID: DP17830
Authors: Filippo Ferroni; Jonas Fisher; Leonardo Melosi
Abstract: We propose a method to allow usual business cycle models to account for the unusual COVID episode. The pandemic and the public and private responses to it are represented by a new shock called the Covid shock, which loads onto wedges that underlie the usual shocks and comes with news about its evolution. We apply our method to a standard medium-scale model, estimating the loadings with 2020q2 data and the evolving news using professional forecasts. It accounts for most of the early macroeconomic dynamics, was inflationary and a persistent drag on activity, and the majority of its effects were unanticipated. We also show how the Covid shock can be used estimate DSGE models with data before, during, and after the pandemic.
Keywords: COVID-19; Pandemic; DSGE Models; Survey of Professional Forecasters; Business Cycles
JEL Codes: C51; E10; E31; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID shock (H12) | initial contraction in output (E23) |
| COVID shock (H12) | decline in per capita hours worked (J29) |
| COVID shock (H12) | rapid rebound in economic activity (E32) |
| COVID shock (H12) | upward pressure on prices (E64) |
| beliefs about future trajectory of COVID shock (E32) | mitigated contraction in GDP (E20) |
| beliefs about future trajectory of COVID shock (E32) | persistent drag on economic activity (F69) |