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The Euro Area’s pandemic recession: A DSGE interpretation

Details

Identification
JRC nr: JRC126311
Publication date
15 October 2021

Description

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.

Authors:

CARDANI Roberta, CROITOROV Olga, GIOVANNINI Massimo, PFEIFFER Philipp, RATTO Marco, VOGEL Lukas

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