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.

Covid-19 contagion, economic activity and business reopening protocols

“…While protocols impose an additional layer of costs to firms, they can have benefits for aggregate economic performance since by reducing the risk of contagion they allow employees to go back to work. Hence, firm protocols do not necessarily produce a tradeoff between economic performance and health as often argued in the case of lockdowns ( Auray, Eyquem, 2020 , Alvarez, Argente, Lippi, 2020 , Eichenbaum, Rebelo, Trabandt, 2020 , Kaplan, Moll, Violante, 2020 ). Some studies have even suggested that lockdowns, if one takes a broader view of their impact on health, have had rather negative consequences for aspects of health unrelated to the spread of the virus.…”

Lockdown, essential sectors, and Covid-19: Lessons from Italy

“…Large scale lockdowns, however, entail costs including lost revenues for firms, lower productivity, and higher unemployment ( Auray, Eyquem, 2020 , Kong, Prinz, 2020 ). This prompted a heated debate among entrepreneurs, legislators, and the epidemiological expert community ( Wong, 2020 ), with some countries refraining from introducing strict nationwide measures.…”

Influence of COVID-19's active cases on Malaysia's key economic performance indicators

“…Hence, labour forces expected to carry out production (Soylu et al, 2018). Auray & Eyquem (2020) also explained the unemployment rate could be confined or reduced during the COVID-19 via Government's several initiatives, especially with the government-linked companies. Thus, these initiatives generate a large amount of slack in the labour market, which will raise the output and productivity to recover the economy.…”