Long-Run Belief-Scarring Effects of COVID-19 in a Global Economy

38 Pages Posted: 6 Jul 2022

See all articles by Wen-Tai Hsu

Wen-Tai Hsu

Institute of Economics, Academia Sinica

Hsuan-Chih Lin

Academia Sinica - Institute of Economics

Han Yang

Academia Sinica - Institute of Economics

Date Written: July 2, 2022

Abstract

While COVID-19 lockdown measures disrupt production worldwide, they also shock workers’ perceptions and beliefs about the economy and may hence have long-lasting effects after the pandemic. We study a belief-scarring mechanism in the context of labor markets and embed this mechanism into a multi-country, multi-sector Ricardian trade model with input-output linkages. Our quantitative analysis indicates that pandemic shocks leave persistent and substantial belief-driven negative impacts on the post-COVID economy. We find that international trade (without sectoral input-output linkages) worsens the post-COVID economic losses due to a labor-misallocation effect when workers misconceive comparative advantages, whereas input-output linkages dampen such losses. When allowing both trade and input-output linkages, a third and negative effect emerges because the presence of the global supply chain amplifies the stake of efficient allocation according to true comparative advantages and hence makes information friction even more costly. Thus, trade, with input-output linkages, exacerbates the post-COVID losses for most countries.

Keywords: pandemic, COVID-19, Bayesian learning, belief-scarring effect, international trade, sectoral input-output linkages, labor misallocation

JEL Classification: F4, F11, D8, E32

Suggested Citation

Hsu, Wen-Tai and Lin, Hsuan-Chih and Yang, Han, Long-Run Belief-Scarring Effects of COVID-19 in a Global Economy (July 2, 2022). Available at SSRN: https://ssrn.com/abstract=4142920 or http://dx.doi.org/10.2139/ssrn.4142920

Wen-Tai Hsu (Contact Author)

Institute of Economics, Academia Sinica ( email )

Taipei
Taiwan

Hsuan-Chih Lin

Academia Sinica - Institute of Economics ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan

Han Yang

Academia Sinica - Institute of Economics ( email )

128 Academia Road, Section 2
Nankang
Taipei, 11529
Taiwan

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