Covid19 and the Macroeconomic Effects of Costly Disasters
The outbreak of covid19 has significantly disrupted the economy. This note attempts to quantify the macroeconomic impact of costly and deadly disasters in recent US history, and to translate these estimates into an analysis of the likely impact of covid19. A costly disaster series is constructed over the sample 1980:1-2019:12 and the dynamic impact of a costly disaster shock on economic activity and on uncertainty is studied using a VAR. Unlike past natural disasters, covid19 is a multi-month shock that is not local in nature, disrupts labor market activities rather than destroys capital, and harms the social and physical well being of individuals. Calibrating different shock profiles to reflect these features, we find that the effects of the event last from two months to over a year, depending on the sector of the economy. Even a conservative calibration of a 3-month, 60 standard deviation shock is forecast to lead to a cumulative loss in industrial production of 12.75% and in service sector employment of nearly 17% or 24 million jobs over a period of ten months, with increases in macro uncertainty that last five months.
Document Object Identifier (DOI): 10.3386/w26987