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Macroeconomic Policy to Aid Recovery after Social Distancing for COVID‐19

Ian McDonald ()

Australian Economic Review, 2020, vol. 53, issue 3, 415-428

Abstract: Using the Keynesian model set out in McDonald (2020), in which downward wage rigidity is supported by worker loss aversion with respect to wages, this article shows that a period of social distancing (SD) can leave a post‐SD economy with both stimulatory and depressive effects. A loss of productive capacity is stimulating. Costs of restarting firms, lower labour productivity when restarted and a desire to restore wealth from debt incurred during the period of SD are depressive. If, as seems highly probable, the net effect on economic activity is negative then a fiscal expansion can restore activity. To avoid an increased government budget deficit, this expansion would probably require an increased tax rate. Reductions in real wages may also be necessary. A desire to balance the government budget combined with no increase in the tax rate would be unfortunate, because it would cause a further contraction in activity from its post‐SD level.

Date: 2020
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Australian Economic Review is currently edited by Ross Williams, Ian McDonald and Mark Wooden

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