Abstract
We discuss the impact of a Covid-19-like shock on a simple model economy, described by the previously developed Mark-0 Agent-Based Model. We consider a mixed supply and demand shock, and show that depending on the shock parameters (amplitude and duration), our model economy can display V-shaped, U-shaped or W-shaped recoveries, and even an L-shaped output curve with permanent output loss. This is due to the economy getting trapped in a self-sustained "bad" state. We then discuss two policies that attempt to moderate the impact of the shock: giving easy credit to firms, and the so-called helicopter money, i.e. injecting new money into the households savings. We find that both policies are effective if strong enough. We highlight the potential danger of terminating these policies too early, although inflation is substantially increased by lax access to credit. Finally, we consider the impact of a second lockdown. While we only discuss a limited number of scenarios, our model is flexible and versatile enough to accommodate a wide variety of situations, thus serving as a useful exploratory tool for a qualitative, scenario-based understanding of post-Covid recovery. The corresponding code is available on-line.
Highlights
The Covid-19 pandemic has buffeted the world economy and induced one of the most abrupt drops in output ever recorded
What comes next? Will the economy recover quickly as lockdown measures are lifted, or will the damage inflicted by the massive waves of layoffs be more permanent? In pictorial terms, will the economic crisis be V-shaped, as commentators were initially hoping for, or U-shaped, or perhaps W-shaped, with a relapse due either to further lockdowns, or to premature lifting of the economic support to households and firms? The possibility of an L-shaped crisis, with a permanent loss of output, is considered
We follow a complementary path and adapt a simplified Agent Based Model (ABM), which we have studied in depth in the context of monetary policy and inflation targeting [16,17,18], to explore how the economic system by itself can—or not—recover from a rapid drop of both supply and demand followed by a quick return to normal
Summary
The Covid-19 pandemic has buffeted the world economy and induced one of the most abrupt drops in output ever recorded. Will the economy recover quickly as lockdown measures are lifted, or will the damage inflicted by the massive waves of layoffs be more permanent? Will the economic crisis be V-shaped (quick recovery), as commentators were initially hoping for, or U-shaped (prolonged drop followed by a quick recovery), or perhaps W-shaped, with a relapse due either to further lockdowns, or to premature lifting of the economic support to households and firms? The possibility of an L-shaped crisis, with a permanent loss of output, is considered. Maybe, a “swoosh”, with a rapid drop followed by an excruciatingly slow recovery? The shape of economic recovery after Covid-19 Maybe, a “swoosh”, with a rapid drop followed by an excruciatingly slow recovery? [1]
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