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. 2020 Oct:190:104260.
doi: 10.1016/j.jpubeco.2020.104260. Epub 2020 Aug 22.

The macroeconomic effects of lockdown policies

Stéphane Auray  1 , Aurélien Eyquem  2   3
Affiliations

The macroeconomic effects of lockdown policies

Stéphane Auray et al. J Public Econ. 2020 Oct.

Abstract

A tractable incomplete-market model with endogenous unemployment risk, sticky prices, real wage rigidity and a fiscal side is calibrated to Euro Area countries and used to analyze the macroeconomic effects of lockdown policies. Modeling them as a shock to the extensive margin of labor adjustment - a rise in separations - produces large and persistent negative effects on output, unemployment and welfare, raises precautionary savings and lowers inflation, in line with early evidence about inflation dynamics. Modeling lockdowns as a shock to the intensive margin - a fall in labor utilization - produces small and short-lived macroeconomic and welfare effects, and implies a counterfactual rise in inflation. Conditional on a lockdown (separation) shock, raising public spending or extending UI benefits by large amounts is much more effective in stimulating the economy than during normal times. Quantitatively however, the ability of such policies to flatten the output and unemployment curves remains limited, even though these policies can alleviate a reasonable share of the aggregate welfare losses from the lockdown.

Keywords: Borrowing constraints; Government spending; Incomplete markets; Lockdown; Unemployment; Unemployment insurance.

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Figures

Fig. 1
Fig. 1
Macroeconomic effects of lockdown policies. Solid black: separation shock (baseline). Dotted black: mix of separation and labor utilization shock. Dotted blue: labor utilization shock. Dashed black: separation and vacancy cost shock. Circled grey: separation shock under perfect insurance. The horizon is shorter for inflation, the nominal and the real interest rate.
Fig. 2
Fig. 2
Recent trends in inflation.
Fig. 3
Fig. 3
The effects of spending and UI benefit policies. Solid black: Baseline lockdown shock alone. Dotted black: lockdown + increase in UI benefit replacement rate. Dotted grey: lockdown + increase in government spending. The horizon is shorter for inflation. Black: UI replacement rate shock. Grey: government spending shock. Solid: around the steady state. Dotted: conditional on lockdown. The horizon is shorter for inflation and the nominal interest rate.
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