Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-time Analysis
29 Pages Posted: 28 May 2020 Last revised: 1 Jun 2020
Date Written: May 27, 2020
We extract aggregate demand and supply shocks for the US economy from real-time survey data on inflation and real GDP growth using a novel identification scheme. Our approach exploits non-Gaussian features of macroeconomic forecast revisions and imposes minimal theoretical assumptions. After verifying that our results for US post-war business cycle fluctuations are largely in line with the prevailing consensus, we proceed to study output and price fluctuations during COVID-19. We attribute two thirds of the decline in 2020:Q1 GDP to a negative shock to aggregate demand. In contrast, regarding the staggeringly large decline in GDP in 2020:Q2, we estimate two thirds of this shock was due to a reduction in aggregate supply. Statistical analysis suggests a slow recovery due to a persistent effect of the supply shock, but surveys suggest a somewhat faster rebound with a recovery in aggregate supply leading the way.
Keywords: macroeconomic volatility, business cycles, COVID-19
JEL Classification: E31, E32, E43, E44
Suggested Citation: Suggested Citation