Caught between a rock and a hard place

Elimination vs suppression

Simon Wren Lewis argues that at the exception of New Zealand, Scotland and Ireland all other governments are focused on suppression as opposed to elimination. The problem with this approach is that governments react when cases rise or decline, but if cases are steady, governments simply tolerate it. Then the “COVID story” drops down the news lineup, people become less scared of the pandemic and relapse to pre-virus behavior. As a result, the suppression strategy is leading to rebounds with no clear strategy of how to deal with them.
The political economy and psychology of COVID rebounds
By: Simon Wren-Lewis – Oxford University

Policy and uncertainty

Silvana Tenreyro summarizes what we have learned so far about the effects of COVID on the economy and the effectiveness of monetary policy at mitigating them. One of her conclusions is that fear of the virus will persist depressing aggregate demand and leading to persistent declines in inflation.

As the economy opens up, we will need to understand the extent to which monetary (as well as fiscal) policy is still able to boost demand as normal. Even as legal restrictions on businesses are removed, it may be that voluntary social distancing hinders the ability of policy to increase activity in some sectors, and potentially in aggregate. Guerrieri et al. (2020) and Baqaee and Farhi (2020) both find that aggregate demand policy injects less stimulus than usual after negative sectoral shocks in their models. My own conjecture is that some of the sectoral changes we are seeing could limit the usefulness of empirical estimates of the aggregate transmission mechanism, including relationships such as the aggregate Phillips curve.

Covid-19 and the economy: what are the lessons so far?
By: Silvana Tenreyro – LSE