The pandemic economic crisis, precautionary behavior, and mobility constraints: an application of the dynamic disequilibrium model with randomness†

Abstract

This article analyzes the economic impact of the pandemic, providing insights into the consequences of alternative policies. Our framework focuses on three key features: (i) The coronavirus disease (COVID-19) is a sectoral shock of unknown depth and duration affecting some sectors and technologies more than others; (ii) there are constraints in shifting resources across sectors; and (iii) there is a high level of uncertainty about the disease and its economic aftermath, inducing a high level of precautionary behavior by some agents and leading to others facing more severe credit constraints. Because of macroeconomic externalities, precautionary behavior exacerbates the downturn, and even sectors where COVID-19 does not directly affect consumption or production may face unemployment. Multipliers associated with different government expenditure programs differ markedly. The article describes policies that can mitigate precautionary behavior, leading to reduced unemployment. Greater wage flexibility may lead to increased unemployment.

Inequalities in the Times of a Pandemic

“…In a nutshell, the pandemic has increased the supply of low-skilled labor, and the demand for high-skilled labor, thus creating a mismatch. The analysis by Stiglitz (2020) reaches the same conclusion. Modeling the macroeconomic consequences of the uncertainty surrounding the pandemic and the resulting precautionary behavior using US data, the author shows that labor-intensive sectors are less attractive, thus reinforcing automation and inequalities.…”

A Literature Review of Pandemics and Development: the Long-Term Perspective

“…These characteristics apply to both health measures and economic policy. Furthermore, when these dramatic events occur, the effective public intervention should be timely (Bai et al 2021;Martin et al 2020;Rodríguez-Caballero and Vera-Valdés 2020;Stiglitz and Guzman 2021) and designed starting from the general characteristics that emerged in this review, and then directed over time by distinctive challenges brought by the specific health shock. The second lesson is that symmetric health shocks will lead to asymmetric economic long-term consequences, as country-specific institutional settings mediate most effects.…”

“…Therefore, the economy converges to a long-term equilibrium only when contagion rates are low. Finally, Stiglitz and Guzman (2021) show that pandemics act as an unanticipated technology shock, generating unemployment that government intervention can effectively counteract. In the long term, uncertainty does not decline, thus further increasing the desirability of government intervention.…”

The long-term economic effects of pandemics: toward an evolutionary approach

“…In addition to these heterogeneous outcomes, similarly described by historians (Pamuk, 2007;Alfani, 2013), Fiaschi and Fioroni also support their evidence on the simultaneous improvement of technological and health trends for many Western countries (Easterlin, 1995(Easterlin, , 1999Gordon, 2016) by calibrating the model for the UK and replicating its macroeconomic and demographic paths from 1541 to 1914. Using the outof-equilibrium concept, Stiglitz and Guzman (2021) show that COVID-19 acts in the short run as an unanticipated technology shock that negatively affects the demand for some goods, thus generating unemployment. Wage flexibility increases unemployment by further reducing effective demand, while unemployment subsidies decrease unemployment by dampening the demand shock.…”