Title: Pandemic meltdown and economic recovery: A multi-phase dynamic model, empirics, and policy
Authors: Willi Semmler - New School for Social Research (United States) [presenting]
Abstract: A two-phase model of a Pandemic meltdown is studied. In the first phase, the spread of Pandemic disease and the effects of a lockdown policy are explored. The output gap either starting from a positive gap (boom period), or negative gap (recession period), does not converge toward the potential output, with the output gap zero, but will stay below it for a considerable time period. This arises from the nonlinearity effects of the lockdown decisions on the output gap, infection and fatality rates. Yet, given a still large fraction of susceptible population in a second phase, the efficacy of an expansionary monetary policy is studied. We explore to what extent and speed it can come to the rescue and help to move the economy out of the meltdown, without significant fatalities. We thus suggest a multi-phase macro model with phase shift where in the first phase the diffusion of the infectious disease, lockdown, fatalities and output decline is dominant. In the second phase of a policy-induced economic recovery, there is still a dynamic interaction of the output gap with the spread of the Pandemic disease though to a lesser extent. The two phases are studied in a regime change model where the state variables and objective functions are allowed to change from the first stage to the second one. The two-phase finite horizon decision model is empirically calibrated and numerically solved through AMPL, a new solution method for finite-horizon dynamic models.