Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis

David Baqaee and Emmanuel Farhi

No 27152, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study supply and demand shocks in a disaggregated model with multiple sectors, multiple factors, input-output linkages, downward nominal wage rigidities, credit-constraints, and a zero lower bound. We use the model to understand how the Covid-19 crisis, an omnibus supply and demand shock, affects output, unemployment, and inflation, and leads to the coexistence of tight and slack labor markets. We show that negative sectoral supply shocks are stagflationary, whereas negative demand shocks are deflationary, even though both can cause Keynesian unemployment. Furthermore, complementarities in production amplify Keynesian spillovers from supply shocks but mitigate them for demand shocks. This means that complementarities reduce the effectiveness of aggregate demand stimulus. In a stylized quantitative model of the US, we find supply and demand shocks each explain about half the reduction in real GDP from February to May, 2020. Although there was as much as 7% Keynesian unemployment, this was concentrated in certain markets. Hence, aggregate demand stimulus is one quarter as effective as in a typical recession where all labor markets are slack.

JEL-codes: E0 E12 E2 E23 E24 E3 E52 E6 E62 (search for similar items in EconPapers)
Date: 2020-05
New Economics Papers: this item is included in nep-mac
Note: EFG ME
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Citations: View citations in EconPapers (130)

Published as David Baqaee & Emmanuel Farhi, 2022. "Supply and Demand in Disaggregated Keynesian Economies with an Application to the COVID-19 Crisis," American Economic Review, vol 112(5), pages 1397-1436.

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Journal Article: Supply and Demand in Disaggregated Keynesian Economies with an Application to the COVID-19 Crisis (2022)
Working Paper: Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis (2020)
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