Monday, April 6, 2020

Óscar Jordá, Sanjay R. Singh, Alan M. Taylor              
CEPR DP No. 14543 | 29 March 2020

How do major pandemics affect economic activity in the medium to longer term? Significant macroeconomic after-effects of pandemics persist for about 40 years, with real rates of return substantially depressed. 

These are is the central findings of a new CEPR study by Óscar Jordá, Sanjay Singh and Alan Taylor, which explores the medium- to long-term macroeconomic effects of global pandemics, through studying rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemics where more than 100,000 people died. Among the findings: 

  • The great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets.
  • Real wages somewhat elevated following pandemics. 
  • Pandemics are followed by sustained periods – over multiple decades – with depressed investment opportunities, possibly due to excess capital per unit of surviving labour, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth.
  • In contrast, wars have no such effect, indeed the opposite. This is consistent with the destruction of capital that happens in wars, but not in pandemics. 

If the trends play out similarly in the wake of Covid-19 – adjusted to the scale of this pandemic – the global economic trajectory will be very different than was expected only a few weeks ago. If low real interest rates are sustained for decades, they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic.

The major caveat is that past pandemics occurred at times when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.

Figure 3: Country-specific response of the real natural rate of interest following pandemics

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