The Economic Ripple Effects of COVID-19
What are the effects of a large temporary shock to the economy such as a temporary lockdown in response to a pandemic? Are the effects propagated and made persistent by firms’ deteriorating balance sheets and labor market frictions? This paper deve...
| Main Authors: | , , , , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2021
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/969291618422677105/The-Economic-Ripple-Effects-of-COVID-19 http://hdl.handle.net/10986/35453 |
| Summary: | What are the effects of a large
temporary shock to the economy such as a temporary lockdown
in response to a pandemic? Are the effects propagated and
made persistent by firms’ deteriorating balance sheets and
labor market frictions? This paper develops a model with
financial market and labor market frictions to answer these
questions. The model makes quantitative predictions about
the effect on output, employment and firm dynamics from
lockdowns of varying magnitude and duration. It finds that
the effects are not persistent despite the deterioration of
the financial soundness of non-essential firms and labor
market frictions, if (i) laid-off workers can be recalled by
their previous employers without having to go through the
frictional labor market and (ii) the government provides
employment subsidies to firms during lockdown. However, the
effect are heterogeneous and young non-essential firms are
disproportionately affected. In addition, if lockdowns lead
to more permanent reallocation across industries, the
recession becomes more protracted. |
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