Discussion Paper Details

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Title: Covid-19 Coronavirus and Macroeconomic Policy

Author(s): Luca Fornaro and Martin Wolf

Publication Date: March 2020

Keyword(s): coronavirus pandemic, COVID-19, Fiscal policy, hysteresis, monetary policy, Productivity Growth, stagnation traps and supply-demand doom loop

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: We provide a simple model to understand some macroeconomic implications of the coronavirus epidemic. We focus on a scenario in which the Covid-19 outbreak causes a persistent supply disruption, potentially extending beyond the end of the epidemic. We show that the spread of the virus might generate a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits. Aggressive policies to support investment can reverse the supply-demand doom loop and jumpstart the economy out of stagnation traps.

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Bibliographic Reference

Fornaro, L and Wolf, M. 2020. 'Covid-19 Coronavirus and Macroeconomic Policy'. London, Centre for Economic Policy Research.