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

By Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, I. Werning. Social Science Research Network, 2020

1,156 citations recorded by the source corpus.

We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/8416098f82f8ce7255ae50f4e2fc143edfd51ac8

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Citations in the corpus

Consumer responses to the Covid‐19 crisis: evidence from bank account transaction data (2020, neutral): “Viewed through the lens of recent macro theory, these results constitute a test of Keynesian supply shocks (Guerrieri et al., 2020).”
News and uncertainty about COVID-19: Survey evidence and short-run economic impact (2020, neutral): “On the other hand, forecasters may see an overall demand shock, consistent with several model-based accounts of the economic impact of the pandemic (e.g. Bayer et al., 2020; Fornaro and Wolf, 2020; Guerrieri et al., 2020).”
Economic and social consequences of human mobility restrictions under COVID-19 (2020, neutral): “Supply shocks can, in fact, trigger variations in aggregate demand that ultimately can be even larger than the COVID-related shocks themselves, hence imposing to immediately incorporating principles of system resilience to systemic disruption in order not to condition the future socio-economic recov”
The Cost of the Covid-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending (2020, neutral): “…quantify the economic costs and benefits of different policies (see Atkeson (2020), Barro et al. (2020), Eichenbaum et al. (2020), Farboodi et al. (2020), Jones et al. (2020), Kaplan et al. (2020), Krueger et al. (2020), Guerrieri et al. (2020), Alvarez et al. (2020), and Dietrich et al. (2020)).”
The Effects of COVID-19 on U.S. Small Businesses: Evidence from Owners, Managers, and Employees (2020, neutral): “An emerging literature is starting to discuss the relative importance and possible interaction between these types of shocks (see, for example, Baqaee and Farhi 2021, 2022; Guerrieri et al. 2020).”
Work from Home After the COVID-19 Outbreak (2020, neutral): “The second explanation is that demand spill-overs and the associated reductions in labor demand affected workers regardless of their ability to work from home (Baqaee et al., 2020; Guerrieri et al., 2020).”
Working Remotely and the Supply-Side Impact of COVID-19 (2020, neutral): “…the amount of federal aid and the degree workers were affected by the pandemic is likely at odds with an optimal policy prescription (see, e.g. Guerrieri et al. 2020) but consistent with evidence from Granja et al. (2020) suggesting that PPP loans do not disproportionately flow to regions…”
THE ECONOMIC IMPACTS OF COVID-19: EVIDENCE FROM A NEW PUBLIC DATABASE BUILT USING PRIVATE SECTOR DATA (2023, positive): “, via unemployment benefit extensions (Guerrieri et al. 2020).”
Pandemic, Shutdown and Consumer Spending: Lessons from Scandinavian Policy Responses to COVID-19 (2020, background): “Some assume that the COVID-19 pandemic is essentially a shock to the supply side with possible spill-overs to the demand side (Guerrieri et al., 2020), while others emphasize that the pandemic affects demand directly because it introduces a health cost of consumption (Eichenbaum et al, 2020).”