Covid-19 Coronavirus and Macroeconomic Policy

12 Pages Posted: 25 Mar 2020 Last revised: 6 May 2020

See all articles by Luca Fornaro

Luca Fornaro

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Barcelona Graduate School of Economics (Barcelona GSE)

Martin Wolf

University of Vienna - Department of Economics; Centre for Economic Policy Research (CEPR)

Date Written: March 2020

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.

Keywords: coronavirus pandemic, COVID-19, Fiscal policy, hysteresis, monetary policy, Productivity Growth, stagnation traps, supply-demand doom loop

JEL Classification: E24, E32, E52, E62, F43, O42

Suggested Citation

Fornaro, Luca and Wolf, Martin, Covid-19 Coronavirus and Macroeconomic Policy (March 2020). CEPR Discussion Paper No. DP14529, Available at SSRN: https://ssrn.com/abstract=3560337

Luca Fornaro (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Martin Wolf

University of Vienna - Department of Economics ( email )

Oskar-Morgenstern-Platz 1
Vienna, Vienna 1180
Austria

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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