Working Paper: NBER ID: w27992
Authors: Joseph E. Stiglitz
Abstract: This paper analyzes the economic impact of the pandemic, providing insights into the consequences of alternative policies. Our framework focuses on three key features: (a) Covid-19 is a sectoral shock of unknown depth and duration affecting some sectors and technologies more than others; (b) there are constraints in shifting resources across sectors; and (c) there is a high level of uncertainty about the disease and its economic aftermath, inducing a high level of precautionary behavior by some agents and leading to others facing more severe credit constraints. Because of macroeconomic externalities, precautionary behavior exacerbates the downturn, and even sectors where Covid-19 does not directly affect consumption or production may face unemployment. Multipliers associated with different government expenditure programs differ markedly. The paper describes policies that can mitigate precautionary behavior, leading to reduced unemployment. Greater wage flexibility may lead to increased unemployment. \nThe precautionary behavior is the antithesis of equilibrium behavior, suggesting that standard equilibrium approaches may not provide the appropriate framework for analyzing the pandemic: individuals know that they don’t know the future, that existing and newly made contracts and plans may be broken, and that they need to be able to respond to these unknowable contingencies.
Keywords: COVID-19; economic impact; precautionary behavior; mobility constraints; government policy
JEL Codes: B22; E21; E23; E24; E61; E63; G28; J21; J23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| precautionary behavior (D91) | increased savings (D14) |
| precautionary behavior (D91) | reduced consumption (E21) |
| reduced consumption (E21) | exacerbates economic downturn (F65) |
| increased savings (D14) | holding more non-produced assets (G19) |
| lower demand for goods (D12) | reduced employment opportunities (J68) |
| government expenditure (H59) | alleviate unemployment (J68) |
| targeted financial assistance (F35) | larger multipliers than untargeted funds (E62) |
| increasing wage flexibility (J38) | worsen unemployment (F66) |
| shifts in precautionary behavior (D91) | changes in effective demand (D12) |
| changes in effective demand (D12) | influence unemployment rates (J65) |