Putting the economic shock of the coronavirus in context (1) Overview using a macroeconomic model
May. 19, 2020
The economic shock from the coronavirus pandemic is fundamentally different from a recession driven by a drop in demand. Specifically, it is a supply shock triggered by a shutdown of economic activity imposed to prevent the community transmission of the virus.
A demand shock resulting from a decline in demand can be reversed or at least mitigated by policies to boost demand, but such measures are impotent in the face of a supply shock like the current one.
The coronavirus shock has led to an economic crisis in which businesses—following government recommendations—have fully or partially shut down their operations, resulting in a loss of sales for companies and of wages and jobs for employees. If nothing is done to address this and large numbers of business exits or failures produce a surge in unemployment, Japanese GDP may fall even further, plunging the nation into a full-fledged depression.
The government must provide immediate cash assistance to affected businesses and individuals. In particular, a moratorium on taxes and other payments to the government is needed as soon as possible, along with cash compensation for forgone income and business losses.