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.