Fiscal Policy and COVID19 Restrictions in a Demand-Determined Economy
We evaluate the effects of COVID19 restrictions and fiscal policy in a model featuring economic slack. The restrictions can reduce current-period GDP by more than is directly associated with the restrictions themselves even if prices and wages are flexible, households can smooth consumption, and workers are mobile across sectors. The most effective fiscal policies depend on (a) the joint distribution of capital operating costs with respect to firm revenues, (b) the extent to which the price of capital adjusts, and (c) additional factors that determine whether the economy will enter a boom or a slump after the restrictions are lifted, such as the effect of the restrictions on inequality and on spending by high-income households.
Document Object Identifier (DOI): 10.3386/w27366