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This is a quick sum of the study's basic intuition: > When workers lose their income, due to the shock, they reduce their spending, causing a contraction in de

This is a quick sum of the study's basic intuition: > When workers lose their income, due to the shock, they reduce their spending, causing a contraction in demand. The question is whether this mechanism is strong enough to cause an overall shortfall in demand. Answer: > Positive, demand may indeed overreact to the supply shock and lead to a demand-deficient recession. Suggested solution: > The optimal policy to face a pandemic in our model combines a loosening of monetary policy as well as abundant social insurance.

thedudeabides5 6y ago
Yeah it a lot of math to propose a link between supply shocks (where everyone to get fired) and demand (via employment). Kind of like in 2008 when the macro guys woke up to the idea of a financial system as important and outside the existing model.
Hokusai 6y ago
> loosening of monetary policy The federal funds rate is zero. So, direct injection of money seems the only way forward. Direct injection failed massively in the last recession where money was given to the markets but failed to reach the consumers. There is a lesson to learn there. Europe approach in the current situation is to pay companies to keep citizens employed in combination with it’s already existing social protections. USA approach has been directed to assure companies capital to keep them for failing. The pandemic is an awful situation but a very interesting economic experiment. Time will tell the pros and cons of the different approaches.
- zozbot234 6y ago
  Monetary loosening did not fail post-2008 recession, except to the extent that it wasn't really tried in the first place. Whenever aggressive monetary loosening was done, even by unconventional means, the market responses in the forex, stock and even in the bond markets were very clear. (Contrary to common misconceptions, loose monetary policy should not be expected to cause low rates in e.g. the bond market; low market rates occur when money has been too tight, and interest-rate based monetary policy works like stabilizing an unstable system, so pushing market rates higher requires setting the policy rate even lower!)
  - nostrademons 6y ago
    That I think was his point: we did see large responses in asset prices, but this excess money going into the forex/stock/bond markets did not trickle down into the labor market like conventional economic theory assumes it would. Instead of stimulating the real economy, it led to asset bubbles and widening income inequality.
    - zozbot234 6y ago
      Excess money does not go "into" markets, it flows through markets and into private-sector balances. And excess money is not what you think it is anyway: when bond-market returns are low due to tight monetary policy in the past, the demand for cash and cash-like instruments is sky-high and the monetary authorities need to create even more excess money to satisfy it. This is pretty much non-negotiable: if you want to avoid this kind of conundrum, you should avoid tight policy in the first place. (High asset prices are simply the flip side of low returns for bond-like instruments.)
      - nostrademons 6y ago
        So that's all technically correct, but the point I'm making is that as that excess money is flowing through asset markets, it's ending up on the balance sheet of private-sector actors who have little need to spend it on a day-to-day basis anyway. In Keynesian terms, money is pooling at precisely those firms who have a low MPC (which is not coincidental: it pools at those firms because they have a low MPC, because pooling indicates a high MPS). Thus the government needs to inject much more money through these markets than it expects, because the Keynesian multiplier is low. In the process, it inflates the paper wealth of these firms significantly more than it actually stimulates the real economy, something we saw from 2010-2020. I think the OP is alluding to the strategy of giving money directly to consumers, and particularly poor consumers (who tend to have a high MPC). This limits the pooling effect: it still happens, but it can't happen until the money has circulated throughout the economy a few times, which increases the stimulus effect for a given amount of inequality generated. As an added benefit, the effects are more immediate, which helps the central bank understand the consequences of its actions more rapidly and not have to act 18 months or so in advance of when the stimulus trickles down to real production.

thedudeabides5 6y ago

Yeah it a lot of math to propose a link between supply shocks (where everyone to get fired) and demand (via employment). Kind of like in 2008 when the macro guys woke up to the idea of a financial system as important and outside the existing model.

Hokusai 6y ago

> loosening of monetary policy The federal funds rate is zero. So, direct injection of money seems the only way forward. Direct injection failed massively in the last recession where money was given to the markets but failed to reach the consumers. There is a lesson to learn there. Europe approach in the current situation is to pay companies to keep citizens employed in combination with it’s already existing social protections. USA approach has been directed to assure companies capital to keep them for failing. The pandemic is an awful situation but a very interesting economic experiment. Time will tell the pros and cons of the different approaches.

zozbot234 6y ago
Monetary loosening did not fail post-2008 recession, except to the extent that it wasn't really tried in the first place. Whenever aggressive monetary loosening was done, even by unconventional means, the market responses in the forex, stock and even in the bond markets were very clear. (Contrary to common misconceptions, loose monetary policy should not be expected to cause low rates in e.g. the bond market; low market rates occur when money has been too tight, and interest-rate based monetary policy works like stabilizing an unstable system, so pushing market rates higher requires setting the policy rate even lower!)
- nostrademons 6y ago
  That I think was his point: we did see large responses in asset prices, but this excess money going into the forex/stock/bond markets did not trickle down into the labor market like conventional economic theory assumes it would. Instead of stimulating the real economy, it led to asset bubbles and widening income inequality.
  - zozbot234 6y ago
    Excess money does not go "into" markets, it flows through markets and into private-sector balances. And excess money is not what you think it is anyway: when bond-market returns are low due to tight monetary policy in the past, the demand for cash and cash-like instruments is sky-high and the monetary authorities need to create even more excess money to satisfy it. This is pretty much non-negotiable: if you want to avoid this kind of conundrum, you should avoid tight policy in the first place. (High asset prices are simply the flip side of low returns for bond-like instruments.)
    - nostrademons 6y ago
      So that's all technically correct, but the point I'm making is that as that excess money is flowing through asset markets, it's ending up on the balance sheet of private-sector actors who have little need to spend it on a day-to-day basis anyway. In Keynesian terms, money is pooling at precisely those firms who have a low MPC (which is not coincidental: it pools at those firms because they have a low MPC, because pooling indicates a high MPS). Thus the government needs to inject much more money through these markets than it expects, because the Keynesian multiplier is low. In the process, it inflates the paper wealth of these firms significantly more than it actually stimulates the real economy, something we saw from 2010-2020. I think the OP is alluding to the strategy of giving money directly to consumers, and particularly poor consumers (who tend to have a high MPC). This limits the pooling effect: it still happens, but it can't happen until the money has circulated throughout the economy a few times, which increases the stimulus effect for a given amount of inequality generated. As an added benefit, the effects are more immediate, which helps the central bank understand the consequences of its actions more rapidly and not have to act 18 months or so in advance of when the stimulus trickles down to real production.