Economic consequences of pandemics

Macroeconomic responses to historic pandemic events in Europe

Jordà and al. focus mainly on European pandemics since macroeconomic data are only available in this region before modern times. They study rates of return on assets using a dataset stretching back to the 14th century, focusing on 12 major pandemic episodes where more than 100,000 people died. They also include major armed conflicts resulting in a similarly large death toll. They find:

• Following a pandemic, the natural rate of interest declines for decades thereafter, reaching its nadir about 20 years later, with the natural rate about 2% lower had the pandemic not taken place.
• European countries experienced the effects of pandemics in strikingly different ways: in countries like France, Italy, and Spain the effects of pandemic are much larger (nearly 10% in Italy and about 4% for France and Spain) in contrast to the Anglo-Saxon bloc of the Germany, the Netherlands and the U.K., with far more modest effects on the natural rate. This heterogeneity reflects, among other explanations, the timing of the pandemics across countries, the relative exposure of each country to the pandemic, the relative size of the working population, and how industrialized each economy was relative to one another.

• The response of real wages is almost the mirror image of the response of the natural rate of interest, with its effects being felt over decades.

• Wars have the opposite effect on the economy: they tend to leave real interest rates elevated for 30–40 years and in an economically (and statistically) significantly way.

• The findings are consistent with pandemics inducing labor scarcity and/or a shift to greater precautionary savings.

Longer-run economic consequences of pandemics
Authors: Òscar Jordà, Sanjay R. Singh, Alan M. Taylor
From: Federal Reserve Bank of San Francisco, University of California, Davis

Macroeconomic responses to historic pandemic events in the U.S.

Using geographic variation in mortality during the 1918 Flu Pandemic in the U.S., we find that more exposed areas experience a sharp and persistent decline in economic activity. The estimates imply that the pandemic reduced manufacturing output by 18%. The downturn is driven by both supply and demand-side channels. Further, building on findings from the epidemiology literature establishing that non-pharmaceutical interventions (NPIs) decrease influenza mortality, we use variation in the timing and intensity of NPIs across U.S. cities to study their economic effects. We find that cities that intervened earlier and more aggressively do not perform worse and, if anything, grow faster after the pandemic is over. Our findings thus indicate that NPIs not only lower mortality; they also mitigate the adverse economic consequences of a pandemic.

Pandemics Depress the Economy, Public Health Interventions Do Not: Evidence from the 1918 Flu
Authors: Sergio Correia, Stephan Luck, and Emil Verner
From: Federal Reserve Board, Federal Reserve Bank of New York, MIT