Title: This time is different: Disentangling the channels of the Covid-19 recession
Authors: Andrew Butters - Indiana University (United States) [presenting]
Scott Brave - Federal Reserve Bank of Chicago (United States)
Abstract: The aim is to examine the macroeconomic dynamics of the recession induced by private and public sector responses to the Covid-19 pandemic in the U.S. Using a large dataset of macroeconomic indicators maintained by the St. Louis Fed (FRED-MD), we show that the unprecedented declines in economic activity in the spring and subsequent rebound in the summer months of 2020 pose a considerable challenge to the use of factor models to consistently capture the macroeconomic dynamics of both the Covid-19 and past U.S. recessions. Unlike what was found for the 2007-09 (Great) recession previously, the dynamics of the Covid-19 recession were very different than prior recessions in the U.S. This result is manifested in a structural break in the factor loadings of single and multifactor representations of the FRED-MD dataset. We describe a simple reduced-form correction that can be made to standard factor models estimated by PCA which isolates the common business cycle variation in economic activity from the idiosyncratic volatility specific to the Covid experience, producing consistent factor loadings and factors throughout the period from the early 1960s through the present.