Results for “multiplier” 112 found
The multiplier in wartime
Robert Barro writes:
What do the data show about multipliers? Because it is not easy to
separate movements in government purchases from overall business
fluctuations, the best evidence comes from large changes in military
purchases that are driven by shifts in war and peace. A particularly
good experiment is the massive expansion of U.S. defense expenditures
during World War II. The usual Keynesian view is that the World War II
fiscal expansion provided the stimulus that finally got us out of the
Great Depression. Thus, I think that most macroeconomists would regard
this case as a fair one for seeing whether a large multiplier ever
exists.
I have estimated that World War II raised U.S. defense expenditures
by $540 billion (1996 dollars) per year at the peak in 1943-44,
amounting to 44% of real GDP. I also estimated that the war raised real
GDP by $430 billion per year in 1943-44. Thus, the multiplier was 0.8
(430/540). The other way to put this is that the war lowered components
of GDP aside from military purchases. The main declines were in private
investment, nonmilitary parts of government purchases, and net exports
— personal consumer expenditure changed little. Wartime production
siphoned off resources from other economic uses — there was a
dampener, rather than a multiplier.
We can consider similarly three other U.S. wartime experiences —
World War I, the Korean War, and the Vietnam War — although the
magnitudes of the added defense expenditures were much smaller in
comparison to GDP. Combining the evidence with that of World War II
(which gets a lot of the weight because the added government spending
is so large in that case) yields an overall estimate of the multiplier
of 0.8 — the same value as before. (These estimates were published
last year in my book, "Macroeconomics, a Modern Approach.")
There are reasons to believe that the war-based multiplier of 0.8
substantially overstates the multiplier that applies to peacetime
government purchases. For one thing, people would expect the added
wartime outlays to be partly temporary (so that consumer demand would
not fall a lot). Second, the use of the military draft in wartime has a
direct, coercive effect on total employment. Finally, the U.S. economy
was already growing rapidly after 1933 (aside from the 1938 recession),
and it is probably unfair to ascribe all of the rapid GDP growth from
1941 to 1945 to the added military outlays. In any event, when I
attempted to estimate directly the multiplier associated with peacetime
government purchases, I got a number insignificantly different from
zero.
I'm a little confused by his definition of the multiplier (how does it relate to "crowding out"?; what he calls a multiplier of zero I would call a multiplier of one), but I think you get the point. By the way, I ran across this interesting short paper on fiscal policy and the fetishization of measured gdp, from Japan.
The multiplier is “one”
And that’s now a blog, written by Susan Woodward and Robert Hall, both impressive thinkers. Greg Mankiw offers additional comment.
Robert Whaples reviews *GOAT*
An excellent piece, here is one excerpt I enjoyed in particular:
Cowen reads the John Maynard Keynes of The General Theory “as writing about an economy where uncertainty was much higher than usual, investment was highly unstable, fiscal policy was unable to fill in the gap, there was a risk or even reality of a downward spiral of prices and wages, monetary and exchange rate policies were out of whack, multipliers operate, the quest for savings could lower incomes overall, and the influence of liquidity factors on money demand and interest rates was especially high. All at once” (p. 72, emphasis in the original). In other words, Cowen drives home the point that this “general theory” isn’t actually general, it’s about very special, very unusual circumstances.
He considers Lord Keynes the GOAT contender whom he would most “want to hang around with” (p. 54). I had exactly the opposite reaction. The Keynes he portrays is virtually an egotistical monster. One who, for example, “kept an extended spreadsheet of his lovers and sexual encounters … each one rated by number” (p. 58). Anyone who treats other human beings this way—let alone writing it down—isn’t the kind of person I want to hang around with.
Recommended.
Russia-Africa facts of the day
Since invading Ukraine, Russia has sought to increase the region’s share of its total global trade above the current 3.7%, with specific attention to increasing African primary commodity exports to Russia. However, African exports to Russia still make up a tiny 0.4% of the region’s total exports. In addition, Russian foreign direct investments in Africa amount to about 1% of the total flow. These numbers are not what one would expect from an alleged geopolitical heavyweight that is supposedly about to remake the region’s alliance terrain.
While Moscow is a leading arms supplier to a number of African states — a fact that is often cited a multiplier of its influence in the region — the actual numbers are inarguably underwhelming. Earlier this year SIPRI, a Swedish tracker of conflicts and trade in arms, noted that Russia had increased its share of weapons supply to Africa to 26% of the regional market share. The report was greeted with the usual willfully ignorant shock and alarm. Yet the figure quickly loses its punch once one realizes that it represents less than $115m in flows to a region of 54 sovereign states. Arms sales in Africa simply aren’t what they used to be (see below).
Here is more from Ken Opalo.
The macroeconomics of immigration
No, this isn’t a question about the real world economics of immigration, this is merely a question about the basic model, viewed as model along.
Let’s say more migrants arrive in a country. One view, held by Bryan Caplan, is that (ceteris paribus) the monetary base is fixed, so now the monetary base per capita has decline. Thus immigration is deflationary. There are more people and not more money, alternatively you could say that the demand to hold money has gone up. (I am, by the way, blogging this with Bryan’s permission.)
Another view, mine, is that the new immigrants shift out both the aggregate demand and aggregate supply curves, and the net effect can be either inflationary or deflationary. Even given a fixed monetary base, M2 likely will go up, as for instance banks will find they have more desirable loans to make, for instance to the new arrivals. Optimal reserve requirements and money multiplier variables are likely to change, so the fixed monetary base need not choke off a demand increase.
Who is right and under which conditions?
Does crypto add to the money supply?
That is a reader request from Jerry Kate:
Is crypto effectively adding to M2 or M3 money supply and hence inflationary (outside the control and models of central banks), or is the velocity of crypto so low that it acts (like stocks) as a store of value having no impact on inflation? Will the answer to the prior question change if the market cap of crypto doubles or if crypto is tweaked to add velocity, or incorporated into the banking system to generate multiplier effects? Should central banks be worried?
I think you could ask this question of monetary economists, and get “confirmed” answers, yet the answers would disagree with each other. My views are as follows:
1. If crypto prices are bubbles, they will encourage more spending and thus they would be inflationary, though only mildly so. And that process could not continue for very long. In the old school “Gurley and Shaw” sense, crypto is a kind of outside money and net wealth, and so spending will rise.
2. Alternatively, let’s say crypto assets have use cases that justify the current prices, but those use cases are not yet actively in use at this moment. The crypto assets are then mildly inflationary now, but an offsetting deflationary impetus will kick in once those use cases arrive and lower the prices of goods and services in the marketplace.
3. Or, let’s say crypto prices are not bubbly, and are justified by current uses. You then have a more or less offsetting boost in both aggregate demand and aggregate supply.
4. An additional question is whether the velocity of (traditional) money is higher or lower in the crypto sector. I don’t know the answer to that question. It is a possible effect, though probably not a major one. If crypto soaks up money in a kind of “segregated from the real economy” shell game, it can be mildly deflationary.
5. Jerry also asks about “incorporating crypto into the banking system.” That could mean a number of things. Under one scenario, stable coins are told to become banks and then they are regulated like banks. It would then be like having more money market funds, and that could be broadly inflationary on a modest, one-time basis, though of course you would have to compare the effects of those money market funds to the “wild west crypto effects” they were displacing.
Any other views or scenarios to consider? Overall I don’t see this as a significant effect in quantitative terms, but it is nonetheless worth thinking through the logic of the question.
Why isn’t there more debate over the Biden economic plan?
That is the topic of my latest Bloomberg column, here is one bit:
My colleague Arnold Kling put it well: “With the reconciliation bill, there is no attempt to convince the public that it is desirable to enact an enormous child tax credit or to mandate ending use of fossil fuels in a decade. Instead, what we read is that if you’re on the blue team you want the number to be 3.5, but a few Democrats are holding out for something lower.”
The Democrats say they might be considering a carbon tax to fund their spending plans, and also to address climate change. You might have expected this news to be on the front page every day, and a dominant topic on Twitter and Substack. Isn’t the fate of the planet at stake, or perhaps an economic depression, depending on your point of view?
There was a lengthy and well-done article in the Washington Post on the political risks associated with this plan. It appeared on Page A21 of the paper edition.
And:
The contrast with earlier but still recent times is obvious. As recently as Barack Obama’s presidency, there was a vigorous policy debate on just about every proposal. A fiscal stimulus of $800 billion? That one was hashed out for months, with detailed takes on the multiplier, the liquidity trap and the marginal propensity to consume, coming from all points of view. Then there was Obamacare, which led to even more passionate and detailed debate over the course of years. Who didn’t have an opinion about the “Cadillac tax” or the proper size of the mandate penalty?
And why has this shift occurred?:
One possibility is that the substantive conversations are occurring on private channels, such as WhatsApp, or in person. This leaves the public sphere a relatively empty shell. Another possibility, more depressing yet, is that the main debate is now about political power and tactics, rather than policy per se. Squabbles over symbols are more common than disagreements over substance, and the influence of various interest groups matters more than the strength of any argument.
Another possibility I did not mention is that perhaps (since DT?) the news cycle has been shifting so rapidly that it no longer very easily sustains this older-fashioned style of ongoing debate? What might some other reasons be?
The anti-science presidency?
…recent Congressional Budget Office estimates suggest that with the already enacted $900 billion package — but without any new stimulus — the gap between actual and potential output will decline from about $50 billion a month at the beginning of the year to $20 billion a month at its end. The proposed stimulus will total in the neighborhood of $150 billion a month, even before consideration of any follow-on measures. That is at least three times the size of the output shortfall.
In other words, whereas the Obama stimulus was about half as large as the output shortfall, the proposed Biden stimulus is three times as large as the projected shortfall…
Looking at incremental deficits relative to GDP gaps is only one way of assessing the scale of a fiscal program. Another is to look at family income losses and compare them to benefit increases and tax credits. Wage and salary incomes are now running about $30 billion a month below pre-covid-19 forecasts, and this gap will likely decline during 2021. Yet increased benefit payments and tax credits in 2021 with proposed stimulus measures would total about $150 billion — a ratio of 5 to 1. The ratio is likely even greater for low-income individuals and families, given the targeting of stimulus measures…
If the stimulus proposal is enacted, Congress will have committed 15 percent of GDP with essentially no increase in public investment to address these challenges. After resolving the coronavirus crisis, how will political and economic space be found for the public investments that should be the nation’s highest priority?
Here is more from L. Summers. And just wondering — what is it you all think the multiplier is these days? Asking for a friend.
“But not all those elasticities are the same…”
That has been one common response to my recent post asking people to be consistent across assumptions about elasticities. And that is true, those differing elasticities are not all exactly the same. Yet a few points remain relevant:
1. If you see the world as dynamic, full of entrepreneurship, and solving problems fairly rapidly and effectively, you should tend to think that a wide variety of elasticities will be high. Conversely, if you think we are all sluggish, overregulated, creatures of routine boobs, you will tend to see a wide variety of elasticities as being pretty low.
That doesn’t have to follow, but if you instead have your own Rube Goldberg approach, well let’s please hear about it in more detail.
2. The elasticities that “most people on Twitter want” are “long run labor demand inelastic” (minimum wage hike good!) and “short run industry supply curve elastic” (stimulus is good!). In other words, they want the short-run elasticity to be higher than the long-run elasticity. By insisting that not all elasticities are the same, they actually have made the problem more difficult for themselves.
3. Individual firm and aggregate supply curves of course can differ. To get the aggregate curve to be more dynamic and responsive than individual curves, typically you would invoke some notion of increasing returns. But a pandemic is exactly when increasing returns are least likely.
Plausibly there are increasing returns to greater vaccine use. But nominal stimulus? Nope. We are not living in a world of “my pet shop is doing so well I am going to spend money on your movie theater.” Apart from the high multiplier associated with public health improvements, we right now live in a world of bottlenecks and sectorally specific problems. Trying to get increasing returns on your side isn’t going to help, in fact it will work against you.
In sum, I am not saying there is no way you can get all of your elasticities to fit together in the preferred manner. After all, if nanotechnology works, alchemy may work too. I am just asking you to…show your work. And in the meantime be less moralizing and dogmatic. Perhaps you cannot in fact, right now, have all of the things you want.
The case for going big is still strong
Since back in April, Michael Kremer, myself, and the AHT team have been advising governments to go big on investing in vaccines. The US, to its credit, made early purchases but they made two mistakes. First, they didn’t buy enough as the Washington Post indicates:
Last summer, Pfizer officials had urged Operation Warp Speed to purchase 200 million doses, or enough of the two-shot regimen for 100 million people, according to people knowledgeable about the issue who spoke on the condition of anonymity because they weren’t authorized to discuss the situation. But the Warp Speed officials declined, opting instead for 100 million doses, they said.
“Anyone who wanted to sell us … without an [FDA] approval, hundreds of millions of doses back in July and August, was just not going to get the government’s money,” said a senior administration official.
But last weekend, with an FDA clearance expected any day, federal officials reached back out to the company asking to buy another 100 million doses. By then, Pfizer said it had committed the supply elsewhere and suggested elevating the conversation to “a high level discussion,” said a person familiar with the talks who spoke on the condition of anonymity because they were not authorized to share the conversation.
In our discussions, we were talking about at least a $70 billion dollar program and optimally double that and we continually faced the sticker shock problem. Investing in unapproved vaccines seemed risky to many people despite the fact that the government was spending trillions on relief and our model showed that spending on vaccines easily paid for itself (the mother of multipliers!). I argued that this was the world’s easiest cost benefit calculation since Trillions>>Billions. But it was hard to motivate more spending—not just in the United States but anywhere in the world. For reasons I still don’t understand anything out of the ordinary–big spending on at-risk vaccines, spending on testing and tracing, challenge trials–was met with a kind of apathy and defeatism. As I said in July:
Multiple people [in Congress] have told me that things move slowly, no one is stepping up to the plate, leadership is absent. “Who is John Galt?,” they sigh. Ok, they don’t literally say that, but that sigh of resignation is what it feels like in the United States today at the highest levels of government.
OWS was actually the one area where there was some action. But there was a second mistake. We argued that governments shouldn’t buy doses but capacity, i.e. they should cover the cost of building a factory or production line in return for an option on doses from that line. The problem with buying doses is that if you buy without a timeline then the company takes all orders and pushes the low-priced orders to the back of the queue. If you demand a timeline, however, that puts a lot of risk on the firms, since not everything is under their control, and that’s expensive and difficult to contract for and monitor. Thus, we advocated for push funding to de-risk capacity construction for the firms. Capacity construction is well understood–double this line–and thus much easier to contract for and monitor. (Contracting on capacity is also cheaper than a traditional AMC for reasons explained here and also in my discussion with Tyler here.) The nice thing about buying capacity is that it changes the dynamic from one where countries are scrambling to buy before others do to one where early purchases increase capacity that is later available for everyone. OWS, to its credit, did fund capacity construction for Moderna but we wanted more and other governments didn’t step up to the plate.
OWS has been a success. In combination with investments from other governments and organizations like CEPI it will save trillions of dollars and many lives. It could have been better but the main takeaway is that the case for going big is still strong. We have solved the scientific problem of making the vaccine but step two is getting billions of doses in arms. If we can increase capacity enough to vaccinate millions more people next year than currently planned that would still pay for itself many times over. Increasing capacity is not impossible. China is increasing capacity for its vaccines. It will be harder to increase capacity for mRNA vaccines since the technology is new and bespoke but it can be done. We need a second Operation Warp Speed, OWS: Delivery and Distribution.
As Tyler said yesterday, Williams wants a cow! We want billions of vaccine doses quickly. It can be done, it should be done.
Monday assorted links
1. State capacity: Italian Police Use Lamborghini To Transport Donor Kidney 300 Miles In Two Hours.
3. This source argues there was no real foreign election interference.
4. “A fact that was never mentioned ahead of time. If we had reached complete suppression vaccine development would have been impossible. Depends, on the math but I think this means that *if* a vaccine is out there slow burn saves lives compared to suppression that eventually snaps” From Karl Smith.
5. “Student loan debt forgiveness likely has a multiplier close to zero. Forgiveness is taxable. If this negative cash flow effect outweighs interest savings would even be net negative. And wealth effect small in short run. Arbitrary/regressive $1T for ~$0 GDP, not a great idea.” From Jason Furman.
Fight the Virus! Please.
One of the most confounding aspects of the pandemic has been Congress’s unwillingness or inability to spend to fight the virus. As I said in the LA Times:
If an invader rained missiles down on cities across the United States killing thousands of people, we would fight back. Yet despite spending trillions on unemployment insurance and relief to deal with the economic consequences of COVID-19, we have spent comparatively little fighting the virus directly.
Economists Steven Berry and Zack Cooper have run the numbers:
By our calculations, less than 8 percent of the trillions in funding that Congress has allocated so far in response to the virus has been for solutions that would shorten or mitigate the virus itself: measures like increasing the supply of PPE, expanding testing, developing treatments, standing up contact tracing, or developing a vaccine. A case in point is the most recent House Covid-19 package. It calls for $3 trillion in spending; less than 3 percent of that total is allocated toward Covid testing. As Congress considers next steps, it’s imperative to shift priorities and direct more funding and effort toward actually ending the pandemic.
Berry and Copper point to the vaccine plan that I am working on as an example of smart spending:
…a group of prominent economists, including Nobel Laureate Michael Kremer, has proposed spending a $70 billion dollar vaccine effort. The proposed expenditure is both much larger than anything proposed by the White House or Congress and also quite cheap compared to the potential benefits.
…[Similarly] Nobel Laureate Paul Romer and the Rockefeller Foundation have each sketched out $100 billion plans to increase testing. We say: Let’s fund both, allocating half the funds directly to states, who can spend to activate the vast capacity of university labs, and also fund Romer’s plan to scale up $10 instant tests for true mass testing. We could create a $50 billion dollar challenge prize that rewards the first 10 firms that develop effective treatments for Covid-19 — $5 billion each. We could fund Scott Gottlieb and Andy Slavitt’s bipartisan $50 billion contact tracing proposal. We could allocate $100 billion to fund the libertarian leaning Mercatus Center’s proposal for advanced purchase contracts to procure massive quantities of PPE.
What makes this all the more confounding is that spending to defeat the virus will more than pay for itself! As I said in my piece in the Washington Post (with ):
Economists talk about “multipliers” — an injection of spending that causes even larger increases in gross domestic product. Spending on testing, tracing and paid isolation would produce an indisputable and massive multiplier effect.
Who gains by killing the economy and letting people die? Yes, it’s possible to spin some elaborate conspiracy about someone, somewhere benefiting. But in talking with people in Congress the message I hear is not that there’s a secret cabal with a special interest in economic collapse and dying constituents. In a way, the message is worse. Multiple people have told me that things move slowly, no one is stepping up to the plate, leadership is absent. “Who is John Galt?,” they sigh. Ok, they don’t literally say that, but that sigh of resignation is what it feels like in the United States today at the highest levels of government.
My Conversation with Adam Tooze
Tinges of Covid-19, doses on financial crises, but mostly about economic history. Here is the audio and transcript. Here is the summary:
Adam joined Tyler to discuss the historically unusual decision to have a high-cost lockdown during a pandemic, why he believes in a swoosh-shaped recovery, portents of financial crises in China and the West, which emerging economies are currently most at risk, what Keynes got wrong about the Treaty of Versailles, why the Weimar Republic failed, whether Hitler was a Keynesian, the political and economic prospects of various EU members, his trick to writing a lot, how Twitter encourages him to read more, what he taught executives at BP, his advice for visiting Germany, and more.
Here is one excerpt:
COWEN: Was Keynes right about the Treaty of Versailles? Was it as bad as Keynes said?
TOOZE: No. I’m a confirmed liberal Keynesian in my broad politics, and my understanding of politics and the way expertise ought to relate to it, and the operations of modern democracy. I think his political writings in Essays in Persuasion are brilliant. But I regard The Economic Consequences of the Peace as disastrous because, essentially, it enhanced and gave arguments to the German nationalists who —
COWEN: But that doesn’t mean Keynes was wrong, right? It may have had that effect, but he’s writing at a time where the wealth-to-income ratio is especially low, so a given measure of debt burden is much worse for an economy than what we might be used to.
TOOZE: Absolutely, but the evidence of the 1920s is that, with the right framework, the Weimar Republic was, in fact, perfectly capable of bearing a reasonable burden of reparations — 2 percent to 3 percent were doable. The fact of the matter is the German political class had no interest in accepting that responsibility and was quite determined to do a variety of different things to escape that burden.
And there is no doubt at all that the front-loading of the demands, which is very understandable from the point of view of the financial needs of the French in particular, caused a huge bottleneck, if you like, early on in the history of the Weimar Republic when it was most fragile. And that’s, as it were, the moment when I think the critique is most valid.
And that’s why, for me, really, the hidden agenda of the economic consequences of the peace is an appeal, to the Brits but above all to the Americans, for large-scale debt concessions, on which one could only agree with Keynes that this was, in fact, absolutely critical, that market economies have unspoken fundamental political preconditions, which, in the aftermath of the massive war, have been disrupted.
And:
COWEN: Speaking of Hitler, was Hitler, in fact, the Keynesian?
TOOZE: No. Hitler personally — absolutely not. Hitler’s personal monetary ideas are very, very conservative. He’s an anti-inflation hawk. He has to be persuaded to engage in large-scale monetary financing.
Somebody like Schacht is a contemporary of Keynes, and that’s Hitler central banker and an adventurous monetary thinker. He’d learned to think outside the monetary box, if you like, in the efforts to stabilize Weimar’s currency in 1923–24. And he’s certainly an expansionary. He’s not afraid of monetary finance and of using off-balance-sheet vehicles to provide liquidity and to provide credit for an underemployed economy.
And quite reasonably, no one’s worried about inflation in 1933 because Germany has massive unemployment. So, in that sense, they are adventurous, macroeconomic, monetary economists.
They’re not Keynesians for the simple reasons that Keynesianism, classically, of course, is a liberal economic politics. It believes in a multiplier, and the multiplier’s the be-all and end-all really of Keynesian economics because what it suggests is that small, intermittent, discretionary interventions by the state — relatively small — will generate outside reactions from the economy, which will enable the state to serve a very positive role in stabilizing the economy but doesn’t require the state to permanently intrude and take over the economy.
That’s a post-1945 kind of vision of a mixed economy. Keynes himself — that’s why he wants the multiplier to be three because if the multiplier is three, then $1 by government spending generates $3 of private economic activity.
You can think of government intervention as sporadic. It’s emergency medicine. It’s not chronic care. That, of course, is the antithesis of what the Nazis are doing because they are ramping up government spending, not across the board, but highly focused on rearmament because what they’re doing is not just creating jobs, though they do create jobs as a side effect. What they’re doing is restructuring the economy towards building the foundation for rearmament in a war economy.
What they’re actually trying to do is systematically repress the multiplier because they do not want people employed in armaments factories to go out and buy clothing and fancy food, which requires imports. They want the money to be circled straight back into the armaments effort. Saving various types of financial oppression is the order of the day. They’re macroeconomists, the Nazis. They’re adventurous macroeconomists. They’re doing massive intervention, but they’re not Keynesian.
Tooze’s discussion of his own career and interests, toward the end, is hard to excerpt but for me the highlight of the conversation. He also provided the best defense of Twitter I have heard.
Definitely recommended.
Big G
Yes, that is the title of a new paper and it is excellent indeed. Lydia Cox et.al bring you a fresh and original look at some properties of government spending:
“Big G” typically refers to aggregate government spending on a homogeneous good. In this paper, we open up this construct by analyzing the entire universe of procurement contracts of the US government and establish five facts. First, government spending is granular, that is, it is concentrated in relatively few firms and sectors. Second, relative to private expenditures its composition is biased. Third, procurement contracts are short-lived. Fourth, idiosyncratic variation dominates the fluctuation of spending. Last, government spending is concentrated in sectors with relatively sticky prices. Accounting for these facts within a stylized New Keynesian model offers new insights into the fiscal transmission mechanism: fiscal shocks hardly impact inflation, little crowding out of private expenditure exists, and the multiplier tends to be larger compared to a one-sector benchmark aligning the model with the empirical evidence.
Via the still excellent Kevin Lewis.
Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?
There is a new NBER paper by Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván 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. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.
All NBER papers on Covid-19 are open access, by the way.