Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?

Veronica Guerrieri, Guido Lorenzoni (), Ludwig Straub and Iván Werning

American Economic Review, 2022, vol. 112, issue 5, 1437-74

Abstract: Motivated by the effects of the COVID-19 pandemic, we present a theory of Keynesian supply shocks: shocks that reduce potential output in a sector of the economy, but that, by reducing demand in other sectors, ultimately push aggregate activity below potential. A Keynesian supply shock is more likely when the elasticity of substitution between sectors is relatively low, the intertemporal elasticity of substitution is relatively high, and markets are incomplete. Fiscal policy can display a smaller multiplier, but the insurance benefit of fiscal transfers can be enhanced. Firm exits and job destruction can amplify and propagate the shock.

JEL-codes: D52 E23 E24 E32 E62 I12 I18 (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? (2020)
Working Paper: Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages? (2020)
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DOI: 10.1257/aer.20201063

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