Scarring Body and Mind: The Long-Term Belief-Scarring Effects of Covid-19

27 Pages Posted: 30 Apr 2020

See all articles by Julian Kozlowski

Julian Kozlowski

New York University (NYU)

Laura Veldkamp

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business; Federal Reserve Banks - Federal Reserve Bank of Minneapolis

Multiple version iconThere are 2 versions of this paper

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 risk, belief-driven business cycles

JEL Classification: D84, E32

Suggested Citation

Kozlowski, Julian and Veldkamp, Laura and Venkateswaran, Venky, Scarring Body and Mind: The Long-Term Belief-Scarring Effects of Covid-19 (April, 2020). FRB St. Louis Working Paper No. 2020-009, Available at SSRN: https://ssrn.com/abstract=3588480 or http://dx.doi.org/10.20955/wp.2020.009

Julian Kozlowski (Contact Author)

New York University (NYU) ( email )

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Laura Veldkamp

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

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Venky Venkateswaran

New York University (NYU) - Leonard N. Stern School of Business ( email )

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Federal Reserve Banks - Federal Reserve Bank of Minneapolis ( email )

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Minneapolis, MN 55480
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