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Economics in the Time of COVID-19

As the Coronavirus continues to spread across the world, economic uncertainty continues to grow. In an effort to better understand the economic impact of this pandemic, our faculty members have been hard at work publishing new research. Below is a selection of published papers and articles from our esteemed faculty members on the potential economic impact of the coronavirus.

Guido Lorenzoni's Research Cited in the Financial Times: "The deflation threat from the virus will be long lasting"

May 6, 2020 – from The Financial Times
It is already obvious that the initial impact of the Covid-19 economic crisis will be strongly disinflationary. Prices have fallen sharply in sectors that have been most affected by the lockdowns, including restaurants, hotels, airlines and housing. Furthermore, the past week has seen an extraordinary dip into negative territory for oil prices, especially at the front end of energy markets. Headline US inflation will, therefore, fall markedly below the Federal Reserve’s 2 per cent target, while the eurozone and Japan will record negative inflation in a matter of months. That, however, is far from the end of the story.


Martin Eichenbaum's Research Cited in Northwestern Now: "‘Smart containment’ can save lives, shorten the recession"

April 27, 2020 – from Northwestern Now
Economists Martin Eichenbaum and Sergio Rebelo say selective quarantine can reduce the number of COVID-19 deaths while lessening negative economic impacts.


Guido Lorenzoni's Research Highlighted in The Economist: "Covid-19 could lead to the return of inflation—eventually"

April 27, 2020 – from The Economist
Inflation in the rich world resembles a fairy-tale beast. Older members of society frighten younger ones with stories of the creature’s foul deeds, but few serious people expect to see one and some doubt it ever existed. Although high inflation seemed a fixture of the economic landscape in the 1970s, changes to policy and the structure of the global economy since have ushered in four decades of ever meeker growth in prices. As covid-19 shutters businesses and leaves supermarket shelves bare, some economists fret that the pandemic could lead to inflation making an unwelcome return.


Check Out Joel Mokyr's Opinion Piece on "Viruses and Other Germs: Winning a Never Ending War"

April 24, 2020 – from CNN
Humans are at war with a foreign and hostile life-form. And no, this is not the "War of the Worlds" — it is a war we have been fighting since the beginning of history, and long before. Human history can be described as an everlasting struggle between people and microscopic pathogens, as author and historian William McNeill taught us a generation ago. We are dealing with a deadly, stubborn, and protean set of enemies. Some are viruses, some are bacteria and some are parasites. Each one is different in how they make us sick and how we fight them.


Martin S. Eichenbaum's Research Cited in Kellogg Insight Article: "Containing COVID-19 Will Devastate the Economy. Here’s the Economic Case for Why It’s Still Our Best Option"

April 6, 2020 – from Kellogg Insight, Sergio Rebelo, Matthias Trabandt
It’s a brutal trade-off: inducing massive economic suffering in order to save human lives. That’s what policymakers across the world are weighing as they decide whether to shutter millions of stores, restaurants, and offices in hopes of curtailing the spread of COVID-19. These drastic policies, enacted across much of the U.S., will undoubtedly save lives. Yet the economic toll of these measures is expected to be in the trillions, leading some commentators, including President Trump, to argue that the cost of stemming the pandemic could soon exceed the human cost of the pandemic itself. However, new research suggests that not shuttering these businesses would be much costlier to society, once both the economic and human costs are factored in. 


Guido Lorenzoni's paper: "Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?"

April 6, 2020 – from Massachusetts Institute of Technology, Veronica Guerrieri, Ludwig Straub, Ivan Werning
We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. 

New York Times Interview with Matthias Doepke: "Why This Economic Crisis Differs From the Last One for Women"

April 1, 2020 – from The New York Times
Today is Equal Pay Day, which represents just how much further into the calendar year American women would have to work to earn what their male counterparts made last year. Women in the United States who work full time, year-round, earn on average 82 cents for every dollar that a man earns, according to Census Bureau data analyzed by the American Association of University Women. Women of color fare far worse: Black women earn 62 cents on the dollar and Hispanic women 54 cents. This year, as a pandemic cripples the economy, these inequities will come into sharp focus, as many women confront the coronavirus on the front lines or lose their jobs because of the economic downturn.

Martin S. Eichenbaum's Research Cited in Science Article, "Can You Put a Price on COVID-19 Options? Experts Weigh Lives Versus Economics"

March 31, 2020 – from Science Magazine
Economist Sergio Rebelo has spent the past 2 weeks holed up in his Chicago home, working feverishly to crack the economics of the coronavirus. Armed with a hybrid model that combines how viruses spread with how people work and consume, the Northwestern University researcher is one of a number of macroeconomists now trying to shed light on the balance between the economic impact of locking down major parts of the economy and the economic damage wrought by the disease itself. 

Martin S. Eichenbaum's Research Being Featured on

March 27, 2020 – from Bloomberg
President Donald Trump is considering easing health directives that prevent the spread of the coronavirus in an attempt to contain economic fallout. A new analysis suggests that those measures are helping to save hundreds of thousands of lives. Economists led by Northwestern University’s Martin Eichenbaum wrote that keeping social-distancing measures in place before the number of new virus cases declines -- in other words, before a peak in the infection rate -- could limit infections and prevent as many as 600,000 additional U.S. deaths…

Kiminori Matsuyama’s co- authored article: Addressing the Economic Fallout from the Coronavirus Crisis: Emergency Proposals by Economists in Japan"

March 26, 2020 – from The Tokyo Foundation for Policy Research, Keiichiro Kobayashi, Motohiro Sato
SUPPORTING AUTHORS: Takero Doi, Takeo Hoshi, Kazuhito Ikeo, Motoshige Ito, Katsuhito Iwai, Daiji Kawaguchi, Nobuhiro Kiyoyaki, Noritaka Kudo, Kiminori Matsuyama, Shigeki Morinobu, Kazumasa Oguro, Tetsuji Okazaki, Takashi Oshio, Tatsuyoshi Saijo, Makoto Saito. We must pool our collective wisdom and mobilize all policy tools to cope with the coronavirus pandemic. We also need to reform our institutions and regulations, including medical delivery schemes, to enhance our social and economic resilience to this crisis. The main priorities of such economic measures should be to (1) prevent the spread of infection, (2) mitigate short-term impacts (such as reduced income or liquidity), and (3) encourage long-term structural reform.

Check Out Dean Karlan's Take on Social Distancing as featured in The Washington Post

March 25, 2020 – from The Washington Post
Our economy runs on mutual interdependence. As we spend time in self-isolation, lets think about all the people that depend on us to make a living: the Lyft driver, the dry cleaner, the child-care provider, the barista at the coffee shop. Everything from sports games to evenings out with friends gets canceled because of covid-19, economic activity is grinding to a halt…

"The Macroeconomics of Epidemics" by Martin S. Eichenbaum, Sergio Rebelo and Matthias Trabandt

March 24, 2020
We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark scenario, the optimal containment policy increases the severity of the recession but saves roughly 0.6 million lives in the U.S.
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