The Pandemic Economic Crisis, Precautionary Behavior, and Mobility Constraints: An Application of the Dynamic Disequilibrium Model with Randomness

Joseph Stiglitz

No 27992, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the economic impact of the pandemic, providing insights into the consequences of alternative policies. Our framework focuses on three key features: (a) Covid-19 is a sectoral shock of unknown depth and duration affecting some sectors and technologies more than others; (b) there are constraints in shifting resources across sectors; and (c) 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 paper describes policies that can mitigate precautionary behavior, leading to reduced unemployment. Greater wage flexibility may lead to increased unemployment. The precautionary behavior is the antithesis of equilibrium behavior, suggesting that standard equilibrium approaches may not provide the appropriate framework for analyzing the pandemic: individuals know that they don’t know the future, that existing and newly made contracts and plans may be broken, and that they need to be able to respond to these unknowable contingencies.

JEL-codes: B22 E21 E23 E24 E61 E63 G28 J21 J23 (search for similar items in EconPapers)
Date: 2020-10
New Economics Papers: this item is included in nep-cta, nep-lma and nep-mac
Note: EFG IFM PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published as Joseph E Stiglitz & Martin M Guzman, 2021. "The pandemic economic crisis, precautionary behavior, and mobility constraints: an application of the dynamic disequilibrium model with randomness†," Industrial and Corporate Change, vol 30(2), pages 467-497.

Downloads: (external link)
http://www.nber.org/papers/w27992.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:27992

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27992

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().