Quantifying the Macroeconomic Effects of the COVID-19 Lockdown: Comparative Simulations of the Estimated Galí-Smets-Wouters Model

Alexander Mihailov ()

No em-dp2020-07, Economics Discussion Papers from Department of Economics, University of Reading

Abstract: This paper considers 3 scenarios regarding the duration of the COVID-19 pandemic lockdown, staying for 1, 2 or 3 quarters, and 2 types of exceptionally rare and devastating disruptions in employment modeled as adverse labor supply shocks, a temporary one with negligible loss in the labor force due to deaths or a permanent one, with significant loss from deaths. The temporary labor supply shock simulations delimit a lower bound, designed to match about 1/4 of the labor force unable to work, and an upper bound, matching about 3/4 of the labor force made economically inactive, broadly consistent with estimates. The permanent labor supply shock is designed to match, in 3 scenarios again, up to 1% loss of the labor force due to mortality, twice milder than the Spanish flu 2% death rate. Estimated calibrations of the Galí-Smets-Wouters (2012) model with indivisible labor for 5 major and most affected by the COVID-19 pandemic economies are simulated: the US, France, Germany, Italy and Spain. The simulations suggest that even in the most optimistic scenario of a brief (lasting for 1 quarter) and mild (with 1/4 of the labor force unable to work) lockdown, the loss of per-capita consumption (6-7% in annualized terms down from the long-run trend in the impact quarter) and per-capita output (3-4% down) will be quite damaging, but recoverable relatively quickly, in 1-2 years. In the most pessimistic simulated scenario of temporary loss the effects will be 10-15 times more devastating, and the loss of output and consumption will persist beyond 10-15 years. Permanent loss of up to 1.5 percentage points of per-capita consumption and output characterizes the simulated permanent labor supply shock.

Keywords: COVID-19 pandemic; simulated macroeconomic effects; medium-scale New Keynesian DSGE models; indivisible labor; shocks to the disutility of labor supply; calibration according to Bayesian estimates (search for similar items in EconPapers)
JEL-codes: C63 D58 E24 E27 E32 E37 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2020-04-20
New Economics Papers: this item is included in nep-cmp, nep-dge, nep-eur, nep-lab, nep-mac and nep-ore
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