Working Paper: NBER ID: w29060
Authors: Serena Ng
Abstract: The coronavirus is a global event of historical proportions and just a few months changed the time series properties of the data in ways that make many pre-covid forecasting models inadequate. It also creates a new problem for estimation of economic factors and dynamic causal effects because the variations around the outbreak can be interpreted as outliers, as shifts to the distribution of existing shocks, or as addition of new shocks. I take the latter view and use covid indicators as controls to 'de-covid' the data prior to estimation. I find that economic uncertainty remains high at the end of 2020 even though real economic activity has recovered and covid uncertainty has receded. Dynamic responses of variables to shocks in a VAR similar in magnitude and shape to the ones identified before 2020 can be recovered by directly or indirectly modeling covid and treating it as exogenous. These responses to economic shocks are distinctly different from those to a covid shock, and distinguishing between the two types of shocks can be important in macroeconomic modeling post-covid.
Keywords: COVID-19; macroeconomic modeling; economic uncertainty
JEL Codes: C18; E32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID as a confounding factor (I12) | variations in post-COVID economic data (E01) |
| COVID indicators (hospitalizations, positive cases, deaths) (I12) | clearer identification of economic factors and shocks (E39) |
| economic uncertainty in March-April 2020 (E32) | no corresponding decline in real economic activity after controlling for COVID (E39) |
| COVID shocks (F65) | distinct responses of economic variables (E39) |
| traditional economic shocks (F69) | distinct responses of economic variables (E39) |
| modeling COVID directly or indirectly (C50) | recovery of dynamic responses to economic shocks (E32) |
| COVID (E37) | identification of causal relationships between economic factors (E65) |