COVID-19 and Its Impact on Financial Markets and the Real Economy

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Abstract

The COVID-19 pandemic severely disrupted financial markets and the real economy worldwide. These extraordinary events prompted large monetary and fiscal policy interventions. Recognizing the unusual nature of the shock, the academic community has produced an impressive amount of research during the last year. Macro-finance models have been extended to analyze the impact of epidemics. Empirical papers study the origins and consequences of the disruptions and the impact of policy interventions. New research evaluates the ongoing financial fragility and its relation to previous episodes and regulations. This special issue contains early contributions to this important and rapidly developing literature. ¹

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Most cited references 11

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A Contribution to the Mathematical Theory of Epidemics

W O Kermack, A McKendrick (1927)

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The Macroeconomics of Epidemics

Martin S. Eichenbaum, Sérgio Rebelo, Mathias Trabandt (2021)

We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size of the associated recession. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the United States.

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Optimal Mitigation Policies in a Pandemic: Social Distancing and Working from Home

Callum Jones, Thomas Philippon, Venky Venkateswaran … (2021)

We study an economy’s response to an unexpected epidemic. The spread of the disease can be mitigated by reducing consumption and hours worked in the office. Working from home is subject to learning-by-doing. Private agents’ rational incentives are relatively weak and fatalistic. The planner recognizes infection and congestion externalities and implements front-loaded mitigation. Under our calibration, the planner reduces cumulative fatalities by 48$\%$compared to 24$\%$ by private agents, although with a sharper drop in consumption. Our model can replicate key industry and/or occupational-level patterns and explain how large variations in outcomes across regions can stem from small initial differences.

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Author and article information

Contributors

Itay Goldstein

Ralph S J Koijen

Holger M Mueller

Journal

Journal ID (nlm-ta): Rev Financ Stud

Journal ID (iso-abbrev): Rev Financ Stud

Journal ID (publisher-id): revfin

Title: The Review of Financial Studies

Publisher: Oxford University Press

ISSN (Print): 0893-9454

ISSN (Electronic): 1465-7368

Publication date (Electronic): 03 August 2021

Publication date PMC-release: 03 August 2021

Electronic Location Identifier: hhab085

Affiliations

[1 ] University of Pennsylvania and NBER

[2 ]University of Chicago , CEPR, and NBER

[3 ]New York University , CEPR, ECGI, and NBER

Article

Publisher ID: hhab085

DOI: 10.1093/rfs/hhab085

PMC ID: 8385830

SO-VID: 5ec85406-56df-43e0-a907-7a7919f8b29a

Copyright © © The Author(s) 2021. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please e-mail: journals.permissions@ 123456oup.com .

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This article is published and distributed under the terms of the Oxford University Press, Standard Journals Publication Model ( https://academic.oup.com/journals/pages/open_access/funder_policies/chorus/standard_publication_model)

This article is made available via the PMC Open Access Subset for unrestricted re-use and analyses in any form or by any means with acknowledgement of the original source. These permissions are granted for the duration of the COVID-19 pandemic or until permissions are revoked in writing. Upon expiration of these permissions, PMC is granted a perpetual license to make this article available via PMC and Europe PMC, consistent with existing copyright protections.

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Pages: 14

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