Coronavirus and macroeconomic policy por Luca Fornaro and Martin Worf published by VOXEU (3/2020).
“As we write, the COVID-19 coronavirus is spreading throughout the globe. Besides its impact on public health, this coronavirus outbreak is likely to have significant economic consequences. The consensus is that the virus will cause a negative supply shock to the world economy, by forcing factories to shut down and disrupting global supply chains (OECD 2020). But how deep and persistent is this supply disruption going to be? Will aggregate demand be affected? How should monetary policy respond? What about fiscal policy?
In Fornaro and Wolf (2020), we look at these questions through the lens of a simple model. We focus on the (hopefully pessimistic) possibility that the supply disruption caused by COVID-19 will be severe and persistent.1 We show that the spread of the virus might cause a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits…”
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