Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages

Citation:

Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, and Ivan Werning. Forthcoming. “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages.” American Economic Review. Publisher's Version
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Abstract:

Motivated by the effects of the Covid-19 pandemic, we present a theory of Keynesian supply shocks: shocks that reduce potential output in a sector of the economy, but that, by reducing demand in other sectors, ultimately push aggregate activity below potential. A Keynesian supply shock is more likely when the elasticity of substitution between sectors is relatively low, the intertemporal elasticity of substitution is relatively high, and markets are incomplete. Fiscal policy can display a smaller multiplier, but the insurance benefit of fiscal transfers can be enhanced. Firm exits and job destruction can amplify and propagate the shock.

Notes:

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Last updated on 11/04/2021