Assessing the Macroeconomic Effects of COVID-19 in an Empirical SFC Model for Denmark

Abstract

The COVID-19 pandemic has tossed the world into a state of uncertainty, not only from a health point of view but also from an economic perspective. Most countries have adopted a strategy of strict lockdowns, leading to a fall in production and a rise in unemployment. From an economic perspective, this lockdown has erupted in supply-and-demand shocks in the economy. In order to investigate the potential impact of these shocks, we develop a post-Keynesian empirical Stock-Flow Consistent (SFC) model for Denmark. The impact of these shocks is analyzed in three different scenarios. Overall, our simulation results indicate that temporary (1 year) shocks in the economy will lead to a fall in output but a quick recovery, whereas persistent shocks can lead to a full-blown economic crisis. We find that the impact of these shocks can be lowered by public intervention in the form of fiscal stimulus, which can reduce the impact of these shocks and also improve the speed of economic recovery. We also address the economic consequences of financing this stimulus, and whether such a policy response is feasible. Our main conclusion is that fiscal stimulus seems to be an effective and affordable policy option available to Denmark.