Abstract
This paper compares the COVID-19 recession in the euro area (EA) and the US using an estimated multi-region New Keynesian macroeconomic model. To capture quarterly dynamics from 2020 onwards, we introduce relevant extensions such as ‘forced’ savings, extensive versus intensive employment margins, and trade in commodities as inputs to production and final demand. Transitory (‘forced’) savings are central to account for the behaviour of economic activity in both regions during the pandemic, which was strongly driven by private consumption, alongside other shocks to domestic demand and shocks to foreign activity. The model highlights the importance of demand recovery and rising commodity prices for the inflation acceleration during 2021–22. EA inflation has a stronger supply component (including commodity prices) compared to a stronger demand component in the US.
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