Working Paper: NBER ID: w27439
Authors: Julian Kozlowski; Laura Veldkamp; Venky Venkateswaran
Abstract: The largest economic cost of the COVID-19 pandemic could arise from changes in behavior long after the immediate health crisis is resolved. A potential source of such a long-lived change is scarring of beliefs, a persistent change in the perceived probability of an extreme, negative shock in the future. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run costs for the U.S. economy from this channel is many times higher than the estimates of the short-run losses in output. This suggests that, even if a vaccine cures everyone in a year, the COVID-19 crisis will leave its mark on the US economy for many years to come.
Keywords: COVID-19; belief scarring; economic outcomes; long-term effects
JEL Codes: E0; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 pandemic (H12) | belief changes regarding tail risks (D81) |
| belief changes regarding tail risks (D81) | persistent reductions in GDP (E20) |
| belief changes regarding tail risks (D81) | reduced investment attractiveness (G31) |
| reduced investment attractiveness (G31) | reduced productive capital (E22) |
| reduced productive capital (E22) | reduced labor demand (J29) |
| belief changes regarding tail risks (D81) | long-run natural rate of interest (E43) |
| policies preventing widespread bankruptcies (K35) | limit adverse effects of crisis on capital returns (G01) |
| limit adverse effects of crisis on capital returns (G01) | yield substantial long-run benefits (J17) |