Working Paper: NBER ID: w26983
Authors: Scott R. Baker; Nicholas Bloom; Steven J. Davis; Stephen J. Terry
Abstract: Assessing the economic impact of the COVID-19 pandemic is essential for policymakers, but challenging because the crisis has unfolded with extreme speed. We identify three indicators – stock market volatility, newspaper-based economic uncertainty, and subjective uncertainty in business expectation surveys – that provide real-time forward-looking uncertainty measures. We use these indicators to document and quantify the enormous increase in economic uncertainty in the past several weeks. We also illustrate how these forward-looking measures can be used to assess the macroeconomic impact of the COVID-19 crisis. Specifically, we feed COVID-induced first-moment and uncertainty shocks into an estimated model of disaster effects developed by Baker, Bloom and Terry (2020). Our illustrative exercise implies a year-on-year contraction in U.S. real GDP of nearly 11 percent as of 2020 Q4, with a 90 percent confidence interval extending to a nearly 20 percent contraction. The exercise says that about half of the forecasted output contraction reflects a negative effect of COVID-induced uncertainty.
Keywords: COVID-19; economic uncertainty; macroeconomic impact; GDP contraction
JEL Codes: D80; E17; E32; E66; L50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 pandemic (H12) | spike in uncertainty (E32) |
| spike in uncertainty (E32) | contraction in US real GDP (E20) |
| COVID-induced uncertainty (D89) | contraction in US real GDP (E20) |
| COVID-19 pandemic (H12) | 28 percent decline in US stock market (N22) |
| COVID-19 pandemic (H12) | rise in VIX (G17) |