Test: Miscellaneous Article - 1
Test: Political and Policy Analysis Article - 1
The Covid-19 pandemic is a global shock ‘like no other’, involving simultaneous disruptions to both supply and demand in an interconnected world economy. On the supply side, infections reduce labour supply and productivity, while lockdowns, business closures, and social distancing also cause supply disruptions. On the demand side, layoffs and the loss of income (from morbidity, quarantines, and unemployment) and worsened economic prospects reduce household consumption and firms’ investment. The extreme uncertainty about the path, duration, magnitude, and impact of the pandemic could pose a vicious cycle of dampening business and consumer confidence and tightening financial conditions, which could lead to job losses and investment. Key challenges for any empirical economic analysis of Covid-19 are how to identify this unprecedented shock, how to account for its non-linear effects, how to consider its cross-country spillovers (and other observed and unobserved global factors), and how to quantify the uncertainty surrounding forecasts, given its unprecedented nature.
A rapidly growing body of research investigates the heterogeneous, non-linear, and uncertain macroeconomic effects of Covid-19 across countries, sectors in individual countries, as well as on a global scale. Pagano et al. (2020) and Capelle-Blancard and Desroziers (2020) consider the effects of the pandemic on the US stock market and highlight its differential impact on various sectors of the economy. Ludvigson et al. (2020) quantify the macroeconomic impact of Covid-19 in the US using a VAR framework and a gauge of the magnitude of the Covid-19 shock in relation to past costly disasters. Baqaee and Farhi (2020) consider possible non-linearities in response to the pandemic in a multi-sectoral model. They demonstrate how these shocks are amplified or mitigated by nonlinearities, and quantify their effects using disaggregated data from the US. McKibbin and Fernando (2020) explore the global macroeconomic effects of alternative scenarios of how Covid-19 might evolve in the year ahead, highlighting the role of spillovers. Our framework embeds the salient features of these quantitative analyses.