Download This PaperScarring Body and Mind: The Long-Term Belief-Scarring Effects of Covid-19
27 Pages Posted: 30 Apr 2020 Last revised: 25 Apr 2022
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Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19
Date Written: April, 2020
Abstract
The largest economic cost of the COVID-19 pandemic could arise if it changed behavior long after the immediate health crisis is resolved. A common explanation for such a long-lived effect is the scarring of beliefs. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run effect of the COVID crisis depends crucially on whether bankruptcies and changes in habit make existing capital obsolete. A policy that avoided most permanent separation of workers from capital could generate a much larger benefit than originally thought, that could easily be 180% of annual GDP, in present value.
Keywords: COVID-19, coronavirus, rare events, tail risks, belief-driven business cycles
JEL Classification: D84, E32
Suggested Citation: Suggested Citation
Laura Veldkamp
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
Venky Venkateswaran
New York University (NYU) - Leonard N. Stern School of Business ( email )
Suite 9-160
New York, NY
United States