Working Paper: NBER ID: w27430
Authors: Martin S. Eichenbaum; Sergio Rebelo; Mathias Trabandt
Abstract: This paper documents the behavior of key macro aggregates in the wake of the Covid epidemic. We show that a unique feature of the Covid recession is that the peak-to-trough decline is roughly the same for consumption, investment, and output. In contrast to the 2008 recession, there was only a short-lived rise in financial stress that quickly subsided. Finally, there was mild deflation between the peak and the trough of the Covid recession. We argue that a New Keynesian model that explicitly incorporates epidemic dynamics captures these qualitative features of the Covid recession. A key feature of the model is that Covid acts like a negative shock to the demand for consumption and the supply of labor.
Keywords: COVID-19; New Keynesian Model; Macroeconomic Dynamics
JEL Codes: E1; H0; I1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 epidemic (H12) | consumption demand (D12) |
| COVID-19 epidemic (H12) | labor supply (J20) |
| COVID-19 epidemic (H12) | recession (E32) |
| declines in consumption demand and labor supply (J20) | declines in consumption (D12) |
| declines in consumption demand and labor supply (J20) | declines in investment (E22) |
| declines in consumption demand and labor supply (J20) | declines in output (E23) |
| labor supply shock dominates demand shock (J20) | steep recession (E65) |
| nominal price rigidities (E31) | exacerbate negative demand shifts (D12) |
| nominal price rigidities (E31) | alleviate negative supply shifts (E00) |
| model predictions (C59) | comovement of consumption and investment (E20) |