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

Departments of Economics is welcoming you to online seminar with Guido Lorenzoni, Northwestern University. 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 shock caused by the COVID-19 epidemic may have this feature.

Welcome to Higher Seminar in Economics organised by the Department of Economics, SSE. The seminar speaker is Guido Lorenzoni, Northwestern University. Guido Lorenzoni will present “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?”.

ABSTRACT: 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 shock caused by the COVID-19 epidemic may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that also holds in 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. Standard fiscal stimulus, spending or non-targeted transfers, can be less effective than usual due to broken links in the Keynesian multiplier feedback. Monetary policy can have magnified effects by preventing firm exits and encouraging labor hoarding. 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 potency of fiscal policy.

 

This is an online seminar which will take place via Zoom. The link to the seminar will be distrubted by invitation only. Please contact lyudmila.vafaeva@hhs.se if you would like to attend the seminar.

Dept. of Economics Seminar in economics Webinar

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