The Euro Area’s pandemic recession: A DSGE interpretation
JRC Working Papers in Economics and Finance, 2021/10
The COVID-19 pandemic led to a sharp contraction of economic activity in the euro area (and worldwide). Its anatomy differs strongly from other crises in recent history. We analyse the short-term economic effects of the COVID-19 shock through the lens of an estimated DSGE model. We augment the canonical DSGE set-up with `forced savings' (lockdowns, social distancing), labour hoarding (short-time work) and liquidity-constrained firms to capture salient demand and supply effects of the COVID shock and the containment and stabilisation policies. Shock decompositions
with the estimated model show the dominant role of `lockdown shocks' (`forced savings', labour hoarding) in explaining the quarterly pattern of real GDP growth in 2020, complemented by a negative contribution from foreign and investment demand particularly in 2020q2 and a negative impact of persistently higher (precautionary) savings. The initial inflation response has been modest compared to the severity of the recession.
CARDANI Roberta;
CROITOROV Olga;
GIOVANNINI Massimo;
PFEIFFER Philipp;
RATTO Marco;
VOGEL Lukas;
2021-10-15
European Commission
JRC126311
https://publications.jrc.ec.europa.eu/repository/handle/JRC126311,
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