Quantifying the economic effect of the COVID-19 induced uncertainty
Baker and al. track and characterize this unprecedented massive increase in uncertainty in near real time using stock market volatility measures, newspaper-based measures of economic uncertainty, and by aggregating over responses to survey questions about perceived business-level uncertainty. They find:
- The implied contraction in U.S. real GDP is 9% in 2020 Q2 on a year-over-year basis and a peak year-on-year contraction of 11% two quarters later;
- This implies that more than half of the contraction is caused by COVID-induced uncertainty.
COVID-Induced Economic Uncertainty
Authors: Scott Baker, Nick Bloom, Steven J. Davis, Stephen J. Terry
From: University of Chicago
Using quantitative models amid COVID-19 uncertainty
Policy-relevant modeling entailing such phenomena isn’t just about epidemiology. Inside the models are individuals making decisions about social interactions and businesses responding to new economic demands and policy restraints. The people “inside the model” respond to changes in their environment and policies that might be implemented along the way. The economist in me has been observing a quantitative macroeconomics literature quickly emerge that incorporates simplified epidemiological specifications of disease within a macroeconomic framework in the face of the crisis. To my colleagues’ credit, they aim to address important policy challenges and to introduce endogenous responses to changing incentives. They explore the health benefits and economic consequences of quarantining a significant portion of the population and the best ways to use testing to improve the social and economic outcomes of the current crisis. We know from a variety of experiences that incentives can matter when assessing policies. But it is no small feat to incorporate epidemiological forces within dynamic models of the economy in credible ways, even putting aside how best to confront the overriding uncertainty.
Using Quantitative Models to Guide Policy Amid COVID-19 Uncertainty
Author: Lars Peter Hansen
From: University of Chicago
