The macroeconomic effects of lockdown policies.

ABSTRACT: A tractable incomplete-market model with endogenous unemployment risk, sticky prices, real wage rigidity and a fiscal side is calibrated to Euro Area countries and used to analyze the macroeconomic effects of lockdown policies. Modeling them as a shock to the extensive margin of labor adjustment - a rise in separations - produces large and persistent negative effects on output, unemployment and welfare, raises precautionary savings and lowers inflation, in line with early evidence about inflation dynamics. Modeling lockdowns as a shock to the intensive margin - a fall in labor utilization - produces small and short-lived macroeconomic and welfare effects, and implies a counterfactual rise in inflation. Conditional on a lockdown (separation) shock, raising public spending or extending UI benefits by large amounts is much more effective in stimulating the economy than during normal times. Quantitatively however, the ability of such policies to flatten the output and unemployment curves remains limited, even though these policies can alleviate a reasonable share of the aggregate welfare losses from the lockdown.

SUBMITTER: Auray S 

PROVIDER: S-EPMC7442895 | biostudies-literature | 2020 Oct

REPOSITORIES: biostudies-literature