DP14529 Covid-19 Coronavirus and Macroeconomic Policy
|Author(s):||Luca Fornaro, Martin Wolf|
|Publication Date:||March 2020|
|Keyword(s):||coronavirus pandemic, COVID-19, Fiscal policy, hysteresis, monetary policy, Productivity Growth, stagnation traps, supply-demand doom loop|
|JEL(s):||E24, E32, E52, E62, F43, O42|
|Programme Areas:||International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14529|
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.