5 ms·

I wonder how this plays out in the real world. Restaurants have suddenly become unavailable, my demand for them has dropped precipitously, they become availabl

I wonder how this plays out in the real world. Restaurants have suddenly become unavailable, my demand for them has dropped precipitously, they become available again, but I don't see myself reverting to my prior demand for years, if ever. Abstract: We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of fiscal policy.

zozbot234 6y ago
> Restaurants have suddenly become unavailable, my demand for them has dropped precipitously, they become available again, but I don't see myself reverting to my prior demand for years, if ever. That's not considered a demand shortage in this context, because you're not necessarily holding on to more cash (the medium of exchange) simply because you've stopped going to restaurants. You might be dispensing of your cash in other ways.[0] It's a negative supply shock that's confined to the restaurant sector. [0] (Yes, there is a multiplier effect but it goes both ways. The multiplier effect is a result of agents trying to keep to their preferred level of cash holdings while facing an outside change in the amount of monetary spending. It's really a "hot potato"/"frozen potato" effect: if agents are suddenly giving you more cash you'll want to spend the excess, and if no one is giving you any money you'll seek to restore your balance either by seeking cash from others or by curtailing your own spending.)
- downerending 6y ago
  I'm not an economist, but I actually am holding onto the cash (putting it in savings). Yes, I'll probably ultimately spend it on something else but not for decades.
  - zozbot234 6y ago
    Unless you're literally buying government bonds (that are yielding very low and sometimes negative returns) your savings will still translate to increased spending elsewhere.
    - skybrian 6y ago
      Well, maybe. There isn't a hard requirement that a bank will invest the money; excess reserves are currently over 3 trillion. https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS The Fed even pays a small amount of interest. IOER is currently 0.1% https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER
    - downerending 6y ago
      I googled for a bit and wasn't able to find a definition for "demand shortage" specifically, so I can only guess at what it means, versus the intuitive idea that "restaurants expected a certain level of demand, and those expectations have been dashed". Does anyone understand the exact point being made?
      - zozbot234 6y ago
        I think the established terminology is more like "demand shortfall". In a general (non-sector-specific) economic context, this almost always refers to a fall in demand for all goods or services that introduces severe frictions into the workings of the market mechanism itself, and that can thus be "solved" in a comparatively straightforward way by addressing these frictions. The "liquidity constraints" discussed in the abstract may be one such friction, but it's quite common for agents to be liquidity-constrained or unwilling to incur debt even irrespective of any negative supply-shock, so it's not quite clear to me what points the paper is trying to make.
JamesBarney 6y ago
They call this demand destruction. It also happens when oil prices get high and companies invest in oil saving technology that permanently reduces their demand.

zozbot234 6y ago

> Restaurants have suddenly become unavailable, my demand for them has dropped precipitously, they become available again, but I don't see myself reverting to my prior demand for years, if ever. That's not considered a demand shortage in this context, because you're not necessarily holding on to more cash (the medium of exchange) simply because you've stopped going to restaurants. You might be dispensing of your cash in other ways.[0] It's a negative supply shock that's confined to the restaurant sector. [0] (Yes, there is a multiplier effect but it goes both ways. The multiplier effect is a result of agents trying to keep to their preferred level of cash holdings while facing an outside change in the amount of monetary spending. It's really a "hot potato"/"frozen potato" effect: if agents are suddenly giving you more cash you'll want to spend the excess, and if no one is giving you any money you'll seek to restore your balance either by seeking cash from others or by curtailing your own spending.)

downerending 6y ago
I'm not an economist, but I actually am holding onto the cash (putting it in savings). Yes, I'll probably ultimately spend it on something else but not for decades.
- zozbot234 6y ago
  Unless you're literally buying government bonds (that are yielding very low and sometimes negative returns) your savings will still translate to increased spending elsewhere.
  - skybrian 6y ago
    Well, maybe. There isn't a hard requirement that a bank will invest the money; excess reserves are currently over 3 trillion. https://fred.stlouisfed.org/series/EXCSRESNS https://fred.stlouisfed.org/series/EXCSRESNS The Fed even pays a small amount of interest. IOER is currently 0.1% https://fred.stlouisfed.org/series/IOER https://fred.stlouisfed.org/series/IOER
  - downerending 6y ago
    I googled for a bit and wasn't able to find a definition for "demand shortage" specifically, so I can only guess at what it means, versus the intuitive idea that "restaurants expected a certain level of demand, and those expectations have been dashed". Does anyone understand the exact point being made?
    - zozbot234 6y ago
      I think the established terminology is more like "demand shortfall". In a general (non-sector-specific) economic context, this almost always refers to a fall in demand for all goods or services that introduces severe frictions into the workings of the market mechanism itself, and that can thus be "solved" in a comparatively straightforward way by addressing these frictions. The "liquidity constraints" discussed in the abstract may be one such friction, but it's quite common for agents to be liquidity-constrained or unwilling to incur debt even irrespective of any negative supply-shock, so it's not quite clear to me what points the paper is trying to make.

JamesBarney 6y ago

They call this demand destruction. It also happens when oil prices get high and companies invest in oil saving technology that permanently reduces their demand.