The Macroeconomic Effects of Lockdown Policies

Stéphane Auray and Aurélien Eyquem

No 2020-10, Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE)

Abstract: A tractable incomplete-market model with unemployment, sticky prices, and a fiscal side is used to quantify the macroeconomic effects of lockdown policies and the mitigating effects of raising government spending and implementing UI benefit extensions. We find that the effects of lockdown policies, although we are relatively conservative about the size of the lockdown, are huge: unemployment doubles on impact and almost triples even for relatively short lockdown durations. Output falls dramatically and debt-output ratios increase by several tens of percentage points. In addition, the surge in unemployment risk triggers a rise in precautionary savings that make such shocks Keynesian supply shocks: aggregate demand falls by more than aggregate supply, and lockdown policies are deflationary. Unfortunately, we find that raising public spending and extending UI benefits stimulate aggregate demand or improve risk-sharing but has little effects on output and unemployment, although they do alleviate the welfare losses of lockdown policies for the households.

Keywords: Lockdown; Unemployment; Borrowing constraints; Incomplete markets; Government Spending; Unemployment Insurance (search for similar items in EconPapers)
JEL-codes: D52 E21 E62 J64 J65 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-ias and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.ofce.sciences-po.fr/pdf/dtravail/OFCEWP2020-10.pdf (application/pdf)

Related works:
Journal Article: The macroeconomic effects of lockdown policies (2020)
Working Paper: The Macroeconomic Effects of Lockdown policies (2020)
Working Paper: The Macroeconomic Effects of Lockdown policies (2020)
Working Paper: The macroeconomic effects of lockdown policies (2020)
Working Paper: The Macroeconomic Effects Of Lockdown Policies (2020)
Working Paper: The Macroeconomic Effects Of Lockdown Policies (2020)
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:fce:doctra:2010

Access Statistics for this paper

More papers in Documents de Travail de l'OFCE from Observatoire Francais des Conjonctures Economiques (OFCE) Contact information at EDIRC.
Bibliographic data for series maintained by Francesco Saraceno ().