Economics in the Time of Covid-19

Debate Moderator(s):  Richard Baldwin, Beatrice Weder di Mauro

While governments and international organisations have been planning for a global pandemic for years, planning for the attendant economic shock has been much less studied. This ‘Vox Debate’ gathers research-based policy analysis and commentary on the economics of COVID-19 from leading economists. The topics will cover all the usual international mechanisms of contagion (trade, capital flows, financial institutions, expectations, etc) as well as the domestic impact such as the size, persistence, and sectoral composition of the economic implements. The topics, however, can range further to include the impact on political economy, populism, income and gender inequality, the environmental impact, precarity of work (gig economy), and more.


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Lead Commentaries

Richard Hughes , 29 March 2020

The coronavirus outbreak requires action from governments around the world. This includes policies to protect the health of citizens and to support the economy, all while safeguarding governments’ financial stability. This column draws on experiences from past viral outbreaks to outline ten lessons for calibrating the correct policy response. Funding for health care systems should be prioritised, and targeted support for households and businesses is crucial. The rising costs and decreasing revenues for governments will also be challenging, and will likely require assistance from central banks as well as international and regional institutions. 

Richard Barwell, Jagjit Chadha, Michael Grady , 29 March 2020

Doing ‘whatever it takes’ does not mean the Bank of England has to undermine long-run monetary and financial stability. This column outlines the options faced by the Bank of England in supporting the economy during the COVID-19 Crisis including closer coordination with fiscal policy.

Antonio De Vito, Juan-Pedro Gomez , 29 March 2020

The coronavirus pandemic has endangered the liquidity position of not only SME firms, but also large listed firms. This column uses firm-level data from 26 countries to study how long it may take for these listed firms to become cash constrained, and what kind of interventions would be most effective. It concludes that while bridge loans would cost governments almost twice as much as a six-month tax deferral, the policy seems justified given the higher efficacy in preventing a global cash crunch. 

Marianna Belloc, Paolo Buonanno, Francesco Drago, Roberto Galbiati, Paolo Pinotti , 28 March 2020

Italy has been hit particularly badly by the COVID-19 pandemic and has one of the highest case fatality rates. High levels of intergenerational interaction in the country have been identified as a potential contributor to this. This column cautions against drawing policy implications from simple cross-country correlation analysis. It argues instead that sound empirical analysis using detailed and harmonised microdata at the European level should be conducted to analyse the effectiveness of policy interventions. 

Ethan Ilzetzki , 28 March 2020

The economic damage from the COVID-19 pandemic is already tangible. In response, fiscal and monetary policies have been introduced by many major economies. This column discusses results from a latest Centre for Macroeconomics survey on the policies best suited for dealing with the economic crisis in the UK. Broad consensus exists on the need to support households and businesses, through unemployment benefits, credit support, and direct transfers. Likewise, a substantial share of economists agree that higher public debt burdens should not be a concern in the process of supporting the economy.

Emanuel Ornelas , 28 March 2020

Countries worldwide are implementing lockdown measures to contain the COVID-19 pandemic. Very soon, the question will be how to lift the lockdowns while keeping the epidemic in check. This column uses basic economic principles to shed light on the key trade-offs. A central message is that there is no ‘health versus economics’ dichotomy. Rather, some degree of lockdown is typically optimal in a crisis like this, balancing economic costs against health benefits. Moreover, the optimal level of lockdown is dynamic, changing over time and eventually becoming more lenient.

Daniel Gros , 28 March 2020

The increasingly draconian measures that European governments have put in place to control the spread of COVID-19 have been taken without reliable information on the true spread of the disease. This column argues that it would be possible to quickly organise an EU-wide survey test of a representative sample of the entire population using an existing panel of European households. This would yield key data on the spread of the disease, for example by showing whether suppression is still possible. Having reliable data which are comparable across countries would also be indispensable for any exit strategy from the internal border controls which have proliferated as the crisis spread.

Lorenzo Bini Smaghi , 28 March 2020

Since the outbreak of COVID-19 in Europe, calls have been made by academics, politicians and observers to adopt Eurobonds to finance the actions needed to support economic activity. This column argues that the proposal poses two important political challenges. The first is to promote a broad transfer of economic and social competences from the national to the European level. The second is to reform the European Stability Mechanism and ensure that a sufficient number of countries apply so as to avoid stigma.

Enrico Perotti , 27 March 2020

Years of quantitative easing by the ECB have suppressed sovereign yields to historic lows. This has contributed to a shadow banking boom, as market participants invested heavily in various private asset constructions. This column argues that the coronavirus shock poses a serious liquidity risk for the shadow banking sector, where significant funding has been extended on the basis of cash flow rather than real collateral. Avoiding financial panic is key, and will require liquidity support as well as targeted fiscal measures. 

Nicholas Bloom, Philip Bunn, Scarlet Chen, Paul Mizen, Pawel Smietanka , 27 March 2020

The spread of COVID-19 has created an important new source of concern for firms. This column reports the findings of the latest Decision Maker Panel survey of UK CFOs, which show that businesses expected the spread of the virus to have a large impact on their sales over the next year. The impacts on sales were expected to be material across all sectors, but businesses in accommodation and food, leisure and transport services expected to be most severely impacted. The survey also suggests that COVID-19 is now a more important source of uncertainty than Brexit for most UK businesses.

Charles Goodhart, Manoj Pradhan , 27 March 2020

The authorities, like most of the rest of us, have been caught short by the sudden advent of the coronavirus pandemic, and are rightly rushing to limit unnecessary deaths. But in doing so, they are imposing a massive supply shock. This column asks what will happen when the lockdown gets lifted and recovery ensues, following this period of massive fiscal and monetary expansion. It argues that we will see a surge in inflation that can only be tackled once indebtedness has been restored to viable levels.

Eran Yashiv , 26 March 2020

The use of helicopter money has been proposed to help combat the economic repercussions of the COVID-19 pandemic. The policy has been seen as blasphemy until now, and this column presents a political economy plan to break the taboo. The creation of emergency authority for central banks and the formation of a COVID policy committee could help establish the policy as a one-off, emergency money-financed plan, giving the central bank the authority to act quickly and then revert to the ‘no money-printing’ norm as the crisis subsides.

Richard Baldwin , 26 March 2020

The economic and medical fight against COVID-19 are linked, as Mathias Dewatripont and a team of virologist pointed out on VoxEU recently. The linchpin is testing. This column argues that testing is critical to (1) reducing the economic pain of the current COVID-19 wave, and (2) reducing the pain of the second wave that some epidemiologists are expecting. The US and Europe should be investing massively in testing capacity.

Erik Berglöf, Jeremy Farrar , 26 March 2020

The COVID-19 pandemic is a two-pronged health and economic crisis, and requires a two-pronged response. Ahead of an extraordinary meeting of G20 Leaders, this letter signed by 20 economists and global health experts has one simple message: this crisis is global and requires unprecedented cooperation across countries and disciplines.

Anniek de Ruijter, Roel Beetsma, Brian Burgoon, Francesco Nicoli, Frank Vandenbroucke , 26 March 2020

An initiative to create centralised control of medical countermeasures at the EU level would solve many coordination issues in times of crisis. However, a unified European response faces a number of legal and political obstacles. This column uses a survey conducted before the COVID-19 outbreak to understand EU citizens’ attitudes towards a joint solidarity programme. It suggests considerable support already exists for an effective policy framework centralising the procurement, stockpiling, and allocation of medicines. 

Jon Danielsson, Robert Macrae, Dimitri Vayanos, Jean-Pierre Zigrand , 26 March 2020

Many comparisons have been made between the coronavirus crisis and the global systemic crisis in 2008. This column argues that seen through the lens of exogenous and endogenous risk, these two crises are quite different. Coronavirus is unlikely to cause a global systemic crisis, and the policy response should be different.

Andrea Ichino, Giacomo Calzolari, Andrea Mattozzi, Aldo Rustichini, Giulio Zanella, Massimo Anelli , 25 March 2020

The world economy cannot survive the current social distancing for more than a few weeks. This column proposes a viable strategy to address the joint health and economic crisis caused by COVID-19, which involves gradually sending the young who face the lowest risks back to work on a voluntary basis. This should happen as soon as the congestion of healthcare systems is less critical, but while a large fraction of the population is not yet immune. All of these workers in centrally relevant sectors must be temporarily separated from the old and the immunocompromised. They must also be frequently tested for COVID-19 and for subsequent immunity as well as monitored to immediately trace the contagion they may induce or receive.

Lorenzo Codogno, Paul van den Noord , 25 March 2020

The COVID-19 outbreak that is hitting the euro area economy needs to be met by a powerful policy response beyond the emergency measures already in place. This column uses an empirically calibrated model to show that the creation of a safe asset and fiscal capacity at the centre – on which the debate has been ongoing for a long while – would be a powerful means to mitigate the economic impact of the crisis.

Group of concerned economists , 24 March 2020

With a significant fraction of workers sick or in quarantine, stay-at-home policies and the closing of borders, the risk of disruptions in supply chains has risen. In this column, a group of concerned economists advocate the establishment of a ‘monitoring cabinet’ to detect problems along the production and distribution chains of essential goods in real time, and inform populations about the availability of these goods in a credible and reassuring manner.

Alexander Dietrich, Keith Kuester, Gernot Müller, Raphael Schoenle , 24 March 2020

The effects of the COVID-19 pandemic on the global economy are still largely unknown. The short-term economic impact will depend importantly on people’s expectations of the overall effect, and the amount of uncertainty thereof. This column uses a survey of US households to show that the expected economic effect is negative, large, and highly uncertain. An asset-pricing equation is used to quantify the implication of these expectations for the natural rate of interest. The natural rate declines by several percentage points, suggesting a role for monetary accommodation to (partially) offset the shock.

Thomas Drechsel, Sebnem Kalemli-Ozcan , 24 March 2020

Strong policy interventions are required to support the economy during the COVID-19 pandemic. This column provides estimates on the costs and effects of a negative lump-sum tax for US SMEs based on firms’ payrolls. A policy covering the payroll for all firms with fewer than 500 employees for three months could benefit 61 million workers in the US at a cost of 3% of GDP.

Francesco Giavazzi, Guido Tabellini , 24 March 2020

This war-like shock will require very large fiscal support. Its financing cost should be distributed over several generations. This can be achieved by issuing irredeemable or very long maturity Eurobonds. They should be backed by the ECB to keep the financing burden low. This column argues that no institutional or legal constraints prevent this policy response. Prompt action is critical since allowing one crisis to morph into many could disrupt the European project, with far-reaching and unpredictable political implications. 

Mathias Dewatripont, Michel Goldman, Eric Muraille, Jean-Philippe Platteau , 23 March 2020

The first phase of the economic response to the COVID-19 pandemic is already under way with measures that, while costly, are relatively ‘easy’. The second phase – restarting the economy – involves the more challenging task of overcoming people’s fears of contracting the virus from a co-worker. This column describes how a combination of two currently available tests could identify people who are both free from COVID-19 and immune to it, and thus are safe to go back to work. A targeted scaling-up of procedures for both tests will help maintain vital services and accelerate the relaunch of the economy, while minimising the risk of the epidemic recurring after restrictions are lifted.

Niels Joachim Gormsen, Ralph Koijen , 23 March 2020

The economic effects of the coronavirus outbreak, and the preventive measures adopted around the world, are still largely unknown. In addition, standard macroeconomic models based on fundamentals may be slow to adapt in this fast-changing environment. This column uses high-frequency data on dividend futures to evaluate the impact on growth expectations. Dividend growth and GDP growth expectations in the US and EU begin to deteriorate after the lockdown in Italy, and these effects are exacerbated by the travel restrictions imposed thereafter. The lower bound on dividend growth is as severe as during the Global Crisis, at least in the short run.

Viral Acharya, Sascha Steffen , 22 March 2020

Stock prices have declined and credit market conditions have tightened in response to the COVID-19 pandemic. Firms typically respond to such outcomes by exercising their liquidity insurance and drawing down their credit lines. This column uses two ‘stress tests’ to demonstrate that the quantum of credit commitments likely to move onto banks’ balance sheets should be manageable thanks to the healthier capitalisation of banks relative to before the Global Crisis.  However, in a severely adverse scenario, the average Tier 1 capital to risk-weighted assets ratio of banks will likely move closer to the regulatory minimum of 8% and well below for some banks.  Regulators should plan in advance for such a severe stress test by ensuring that banks prevent any further capital depletion through dividend payouts or share buybacks. 

Richard Baldwin , 22 March 2020

“Go big. Act fast. Keep the lights on” is good advice for governments trying to flatten the epidemiological and recession curves simultaneously. This column argues that the combination of containment policies that dampen production and stimulus policies that maintain spending will generate supply-side problems. Cost-push inflation may return, political pressures for price controls and rationing may be irresistible, and governments may find themselves engaged in thinking about production and logistics of the type not undertaken since the 1940s.

Arnstein Aassve, Guido Alfani, Francesco Gandolfi, Marco Le Moglie , 22 March 2020

Long-term effects of a pandemic go well beyond the demographic losses. This column uses a representative survey of the US population in the aftermath of the Spanish flu to evaluate the permanent consequences of the pandemic on individual behaviour. It finds that social disruption during the period led to long-term deterioration in social trust, which had important economic consequences. The findings highlight the importance of a strong response to the COVID-19 pandemic. 

Thiemo Fetzer, Lukas Hensel, Johannes Hermle, Chris Roth , 21 March 2020

There is a risk that economic anxiety over the coronavirus crisis will fuel a long-term economic downturn. This column uses Google search activity and individual survey data to document a rapid increase in economic anxiety in the US in response to the initial global spreading of the virus. Survey respondents tended to overestimate the mortality and contagiousness of COVID-19, but underestimated the non-linear nature of how infectious diseases spread. This suggests that information and public education may play a central role in containment and in managing the negative economic impact of increased economic anxiety.

Steven Hamilton, Stan Veuger , 21 March 2020

The threat posed by the pandemic cannot be addressed simply by relying on Keynesian demand stimuli. This column explores the notion of using public spending to build a bridge for businesses during this unprecedented period. The EU needs to be open to a variety of new policy measures to meet the challenge head on, perhaps even turning to Eurobonds to deal with lingering fiscal sustainability concerns going forward.

Bo Becker, Ulrich Hege, Pierre Mella-Barral , 21 March 2020

The coronavirus pandemic is likely to lead to a steep, and potentially protracted, economic downturn. In response, many countries have implemented ambitious packages to support households and businesses. This column argues that in light of already elevated debt burdens, provisions for future debt restructuring should be made as soon as possible. These include carefully designed bailout packages, speedier in-court insolvency proceedings, and a stronger role of the state in dealing with renegotiations. Failure to plan and prepare for these cases could lead to a much slower economic recovery.

Agnès Bénassy-Quéré, Arnoud Boot, Antonio Fatás, Marcel Fratzscher, Clemens Fuest, Francesco Giavazzi, Ramon Marimon, Philippe Martin, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker, Pedro Teles, Beatrice Weder di Mauro , 21 March 2020

It is in the interest of every EU member state that countries in the Union hit by the coronavirus are able to take the necessary measures to control the pandemic and deal with the economic consequences without being constrained, and to do so very quickly. This column proposes a Covid credit line in the European Stability Mechanism, with allocation across member states proportionate to the severity of the public health and economic challenges encountered. While it would involve some coordination and solidarity among member states, the dedicated credit line would reduce risks to economic and financial stability for all while allowing members to sustain their efforts by making their borrowing costs less dependent on individual fiscal situations.

Robert Barro, Jose Ursua, Joanna Weng , 20 March 2020

What is a plausible worst-case scenario for outcomes under COVID-19? This column draws lessons from the 1918-1920 Great Influenza Pandemic. Data for 43 countries imply flu-related deaths back then of 39 million, 2% of the world population, implying 150 million deaths when applied to current population. Controlling for effects from WWI, GDP and consumption in the typical country declined by 6% and 8%, respectively, while real returns on stocks and short-term government bills fell meaningfully. Large potential losses in lives and economic activity justify current policy actions to limit the damage, but there is a difficult tradeoff between mortality and lost output, and this tradeoff warrants discussion that is absent so far.

Luis Garicano , 20 March 2020

Faced with a huge increase in the number of COVID-19 cases, by now all EU governments have undertaken strategies of varying degrees to ‘flatten the curve’ – to reduce the rate of growth of the pandemic in order to avoid a collapse of European healthcare systems. This column, taken from the recent Vox eBook, proposes a €500 billion ‘bazooka’ to fight the virus, stabilise the European economy, and protect its jobs while the economy is in the ‘freezer’. It also discusses how to finance this package. 

Bartosz Maćkowiak, Mirko Wiederholt , 19 March 2020

Economists may not have been able to do much about the outbreak of the coronavirus, but this column argues that economics can help tackle the problem at its source by reducing the spread of the virus. Using a theory of decision-making by agents who have limited information-processing ability, it offers various recommendations for individuals and policymakers to limit the spread of COVID-19.

Simon Evenett , 19 March 2020

Given the centrality of China to many international supply chains, there is considerable interest in the impact of COVID-19 on global trade flows. And a troubling trade policy dimension is now coming to light. This column reports on and assesses a finding of the Global Trade Alert that 24 nations have recently imposed export restrictions on medical supplies.

Claudia Biancotti, Alessandro Borin, Federico Cingano, Pietro Tommasino, Giovanni Veronese , 18 March 2020

Governments around the world are tackling the COVID-19 pandemic from different angles. This column, by members of the Bank of Italy’s COVID-19 monitoring group, argues that in the absence of coordinated containment measures, the most likely outcome is the worst of both worlds: preventable loss of lives and of GDP. Predictability and consistency in policy responses across space and time is key, both in the public health and economic domains. Effective cooperation in avoiding a 'common bad' might be able to endow the world with the crucial common good of a more complete and effective governance. The European Union should be the first to set an example.

Jordi Galí , 17 March 2020

The measures many countries are taking to contain the spread of coronavirus, while necessary, are bound to have a direct impact on the economy. This column argues that rather than raising taxes and/or increasing government debt to finance the necessary fiscal programmes, the time has come for ‘helicopter money’ – direct, unrepayable funding by the central bank of the additional fiscal transfers deemed necessary.

Group of concerned economists , 16 March 2020

The COVID-19 pandemic is an extreme event that threatens the health and economic wellbeing of populations across the globe. This manifesto from a group of Portuguese economists calls for urgent action from the EU to prevent the suffering of its people and to save itself and the democratic values it stands for. A large-scale emergency programme requires massive emergency funding, and in the face of extraordinary circumstances, the ECB must be allowed to finance such a programme.

Richard Baldwin , 15 March 2020

Estimates by medical experts suggest that the US does not have the hospital capacity to handle a spike in COVID-19 cases as large as the one seen in Italy. Avoiding triage situations at US hospitals is particularly important given the health vulnerability of so many Americans, the incipient rage stemming from decades of economic malaise and rising inequality, and the widespread ownership of guns. The solution is to err on the side of caution by implementing immediate, large-scale social distancing.

Romesh Vaitilingam , 14 March 2020

As tumbling stock markets indicated growing fears about the potential economic impact of the coronavirus, the IGM Forum at Chicago Booth invited its panels of leading economists in the US and Europe to express their views on the likelihood of a major recession. This column reveals a broad consensus across the experts that there will be a sharp downturn in the economy, but less agreement on how prolonged the dip is likely to be. Asked about the relative importance of supply and demand shocks damaging the economy, reactions were more mixed. But over two-thirds of the European economists are highly doubtful of the readiness of the economic policy institutions of the euro area to respond effectively to the potential damage from COVID-19.

Henrik Müller , 14 March 2020

The coronavirus crisis is hitting economies hard. This column argues that policymakers risk doing too little too late – and creating plenty of confusion on the way. It also suggests some lessons that can be learnt from the response to the last crisis.

Richard Baldwin , 13 March 2020

The COVID-19 economic crisis is different. It hit the economic giants all at once – the G7 nations and China. And the economic strikes are widely spread, hitting many sectors all at once. It is not a credit crisis, or a banking crisis, or a sudden-stop crisis, or an exchange crisis. Today’s crisis is a bit of all these. Given the transient nature of the underlying medical shock, this column argues that governments should focus on ‘keeping the lights on’ using costly but quick measures to ensure the circular flow of money continues to circulate. The goal should be to reduce the persistence of the crisis and avoid the unnecessary accumulation of ‘economic scar tissue’.

Richard Baldwin , 12 March 2020

The spread of COVID-19 is not going to follow an exponential curve – and grave errors will follow if analysts believe it will. The number of new cases rises rapidly, peaks, and then declines. It’s called the epidemiological curve. It’s not a theory or hypothesis; it plays out that way every flu season. It is how it has played out in China and Korea for COVID-19. Flattening the peak to avoid overloading the healthcare system is the main medical goal of the seemingly extreme containment policies we have seen to date.

Stefano Ramelli, Alexander Wagner , 12 March 2020

The novel coronavirus represents a fearsome risk which is stirring feverish behaviour by investors worldwide. This column shows that initially, economic expectations about international trade underlay movements in the stock prices of individual firms; later, concerns about corporate debt began to play a role. 

Agnès Bénassy-Quéré, Ramon Marimon, Jean Pisani-Ferry, Lucrezia Reichlin, Dirk Schoenmaker, Beatrice Weder di Mauro , 11 March 2020

The unfolding coronavirus epidemic represents a severe economic stress test for Europe as well as a test of European unity. This column discusses how the crisis might unfold and the appropriate policy response. It advocates a comprehensive emergency package through which the EU would take responsibility for a meaningful share of the overall emergency effort.

Rabah Arezki, Rachel Yuting Fan , 10 March 2020

A combination of supply and demand shocks has sent oil prices plunging and financial markets tumbling. This column argues that if the decline in oil prices persists, it will erode the fragile macroeconomic and social stability of countries, especially in the Middle East and North Africa, that have been hit by the novel coronavirus. 

Luca Fornaro, Martin Wolf , 10 March 2020

The consensus is that the coronavirus outbreak will cause a negative supply shock to the world economy, by forcing factories to shut down and disrupting global supply chains. This column develops a simple model to show that the spread of the virus might cause a demand-driven slump, give rise to a supply-demand doom loop, and open the door to stagnation traps induced by pessimistic animal spirits.

Richard Baldwin, Beatrice Weder di Mauro , 06 March 2020

The novel coronavirus is both something old and something new. As usual, the pandemic is both an aggregate demand and an aggregate supply shock, but the fact that it has hit China first and hardest, and the supply chain implications of this, make it something new. This column introduces a new Vox eBook containing 14 essays written by leading economists on a wide array of topics related to COVID-19 economics.