The Economic Ripple Effects of a Temporary Shutdown

Pablo Andrés Neumeyer (), Francisco J. Buera (), Roberto N. Fattal Jaef (), Hugo Hopenhayn () and Yongseok Shin ()

Department of Economics Working Papers from Universidad Torcuato Di Tella

Abstract: We analyze the economic ripple effects of a temporary shutdown, such as those experienced during the Covid-19 pandemic. Using a model incorporating financial and labor market frictions, we explore how varying magnitudes and durations of shutdowns impact output, employment, and firm dynamics. We find that the effects are not persis- tent if workers on temporary layoffs can be recalled without frictions and if government policies effectively protect the balance sheets of financially constrained firms. With im- perfect insurance, young firms are disproportionately affected. Additionally, we find that recovery is more prolonged if shutdowns are accompanied by other shocks that cause additional reallocation within or across industries. Although motivated by the Covid-19 pandemic, the model can be applied to other large, temporary shocks such as wars, cyber-attacks/outages, and natural disasters.

Pages: 59 pages
Date: 2025-03
New Economics Papers: this item is included in nep-dge
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