The Covid epidemic disproportionately affected the economic well-being and health of poor people. To disentangle the forces that generated this outcome, we construct a model that is consistent with the heterogeneous impact of the Covid recession on low- and high-income people. According to our model, two thirds of the inequality in Covid deaths reflect pre-existing inequality in comorbidity rates and access to quality health care. The remaining third, stems from the fact that low-income people work in occupations where the risk of infection is high. Our model also implies that the rise in income inequality generated by the Covid epidemic reflects the nature of the goods that low-income people produce. Finally, we assess the health-income trade-offs associated with fiscal transfers to the poor and mandatory containment policies. (for an extended read on this paper, please follow Why Do COVID-19 Death Rates Differ Wildly from Place to Place? (northwestern.edu)

The expansion of global value chains has fuelled global economic growth in the past decades. Nevertheless, recent trade wars and the ongoing pandemic have shown how global value chains are inherently fragile and how grave are the disruptions they may cause to a well-functioning global economy. Such events have also shown how little do we know about their deep characteristics. Drawing from novel granular data harmonized across a number of EU countries we attempt to fill that gap. We map the patterns of offshoring of both core and support functions across different regions, and study the relationship between offshoring and firm performance in terms of productivity, output growth and output volatility. Understanding those patterns and relationships can guide policy makers in designing policies that enhance both the efficiency and resilience of their economies.

Martin Eichenbaum, Sergio Rebelo, Mathias Trabandt

Presented by Mathias Trabandt

Sergio Inferrera, Kalina Manova, Filippo di Mauro, Stela Rubinova

We estimate factors predicting firm failures in the COVID crisis using French firm-level data. Although the number of firms filing for bankruptcy in 2020 was much below its 2019 level (- 36%) the same factors that predicted firm failures (primarily debt and productivity) in the past were at work in 2020. At this stage, partial hibernation rather than zombification characterises the selection into firm survival or failure.  We also find that the sectoral heterogeneity of the turnover COVID shock has been largely (but not fully) absorbed by public policy support. Finally, we sketch some potential scenarios for 2021-2022 for different sectors. Even for sectors most affected, our empirical estimates suggest that the rise in firm failures should mostly come from a catch-up effect of firms that should have failed in 2020.

Along the normalisation of the epidemic situation, European policymakers have started to discuss the withdrawal or recalibration of the policy support setup during the crisis. In order to shed light on possible options, we use firm level analysis drawing from the EIB Investment Survey (EIBIS) sample, a dataset of around 45,000 firms. We focus on the questions related to the policy support entailed in the 2021 vintage to illustrate the effectiveness of the support implemented and discuss possible recalibrations of the measures to foster investment and productivity post Covid-19.
First, at the firm level, we estimate the relationship between investment intensity, demand, productivity level and four indicators of corporate vulnerability. Our vulnerability indicators of distance to losses, to insolvency, to illiquidity and to default, take into account the widening of the profit distribution across firms and within sectors when demand slumps.
Second, we estimate the relationship between exit rate and the vulnerability indicators for 16 sectors by size of firms. We show that the relationship differs across sectors and is stronger for smaller firms. We then project the four vulnerability indicators by simulating the evolution of corporate profits during the Covid-19 crisis. We thereby illustrate the effectiveness of the policy support with counterfactual simulations. We then take into account the sectoral and size composition of each European economy to build macro-risk indicators of an uneven recovery.
Third, we analyse the factors that enable firms to recover stronger from the crisis, reaching higher productivity buckets. We estimate quantile regressions for the changes in productivity controlling for the changes in demand addressed at the sector level and in the balance sheet structure. While preserving access to liquidity proved to be key during 2020, increased leverage may reduce firms’ capacity to invest. We highlight the role of a stronger equity base to support productivity growth post Covid-19.   

Mathieu Cros, Anne Epaulard, Philippe Martin

Peter Harasztosi, Laurent Maurin, Rozalia Pal,  Debora Revoltella

Aggregate-Demand Amplification of Supply Disruptions:
The Entry-Exit Multiplier

The response of entry and exit to adverse supply shocks, such as COVID-19, is amplified by nominal rigidities. This leads to further amplification in the response of aggregate demand.
Firms’ inability to adjust their prices induces further changes in profitability that engender additional entry-exit dynamics. These changes in net entry, in turn, amplify the initial response to the shock by generating additional curvature in the relationship between the shock and aggregate demand. Even in our baseline model with efficient equilibrium entry, this entry-exit multiplier triggers a substantial magnification of the welfare losses due to a negative shock through these second-order effects. Nominal rigidities may also induce a first-order effect when entry is no longer efficient. Our model highlights how the addition of endogenous entry to a benchmark New Keynesian model radically changes the consequences of nominal rigidities. We focus on the amplification of aggregate demand to supply shocks, but also highlight other key divergences that can potentially resolve some empirical discrepancies associated with the workhorse New-Keynesian model.

Using new panel data from a representative survey of households in the six largest euro area economies, the paper estimates the impact of the Covid-19 crisis on consumption. The panel provides, each month, household-specific indicators of the concern about finances due to Covid-19 from the first peak of the pandemic until October 2020. The results show that this concern causes a significant reduction in non-durable consumption. The paper also explores the potential impact on consumption of government interventions and of another wave of Covid-19, using household-level consumption adjustments to scenarios that involve positive and negative income shocks. Fears of the financial consequences of the pandemic induce a significant reduction in the marginal propensity to consume, an effect consistent with models of precautionary saving and liquidity constraints. The results are robust to endogeneity concerns through use of panel fixed effects and partial identification methods, which account also for time-varying unobservable variables, and provide informative identification regions of the average treatment effect of the concern for Covid-19 under weak assumptions.

Florin Bilbiie, Marc Melitz

Dimitris Christelis, Dimitris Georgarakos, Tulio Jappelli, Geoff Kenny

We offer an historical perspective that helps evaluate the likelihood of success of the ‘Next Generation EU’ (NGEU) funds. We empirically study the regional macroeconomic dynamics produced by the two largest EU structural funds that share similar features with the NGEU. We show that EU grants can have a useful role in counteracting generalized recessions and in boosting job creation and investments that may lead to economic transformation. ERDF has positive short term effects, while ESF has insignificant impact effects, but medium term multipliers are positive and significant.  Yet, we find that EU funds benefit some regions more than others, and the less fortunate turn out to be poorest, peripheral, and non-Euro regions of recently added countries, implying that the adjustment and transformation process could be unequal. We develop a theoretical model that helps us to structurally interpret our empirical findings and can be used for policy analysis.

According to the World Bank, school closures in response to the global outbreak of the Covid-19 crisis affected around 1.6 billion school children worldwide. While the economic costs of closing businesses arise immediately, closed schools have negative economic effects on the human capital accumulation of children that only become observable in the long-run. To provide an estimate of these effects, we build a model that features public schooling as an input into the human capital production of children, in addition to monetary and time investment of parents. Parents differ with respect to marital status, education, income, and assets. We find that US children affected by the school closures suffer long-run average wage losses of -1%. Summing these up and discounting them to today, they amount to 1.4% of the US pre-crisis GDP. Younger children and children from disadvantaged households suffer the most. Similar effects are likely for Europe, and support for these children in the coming months and years is crucial.

Fabio Canova, Evi Pappa

Nicola Fuchs-Schündeln, Dirk Krueger, Alexander Ludwig, Irina Popova

Our paper decomposes euro area sovereign bond yields into five distinct components: i) expected future short-term risk-free rates and a term premium, ii) default risk premium, iii) redenomination risk premium, iv) liquidity risk premium, and a v) segmentation (convenience) premium. Identification is achieved by considering sovereign bond yields jointly with other rates, including sovereign credit default swap spreads with and without redenomination as a credit event feature. We apply our framework to study the impact of European Central Bank (ECB) monetary policy and European Union (E.U.) fiscal policy announcements during the Covid-19 pandemic recession. We find that both monetary and fiscal policy announcements had a pronounced effect on yields, mostly through default, redenomination, and segmentation premia. While the ECB's unconventional monetary policy announcements benefited some (vulnerable) countries more than others, owing to unprecedented flexibility in implementing bond purchases, the E.U.'s fiscal policy announcements lowered yields more uniformly.

Whereas recent recessions in advanced economies had a disproportionate impact on men's employment, giving rise to the moniker "mancessions," the pandemic recession of 2020 was a "shecession" with larger employment declines among women in most countries. We show that in European countries, both the composition of women's employment across industries and occupations as well as increased childcare needs during closures of schools and daycare centers contributed to this pattern. Gender gaps in the employment impact of the pandemic arise almost entirely among workers who are unable to work from home. Among telecommuters a different kind of gender gap arises: women working from home during the pandemic spent more work time also doing childcare and experienced greater productivity reductions than men. These observations raise important challenges for policy addressing gender inequality and family needs in a post-pandemic labour market that will likely continue to be characterized by pervasive telecommuting.

Stefano Corradin, Niklas Grimm, Bernd Schwaab

Matthias Doepke, Tital Alon, Jane Olmstead-Rumsey, Michèle Tertilt

The current low interest rate environment has limited the traditional (monetary) tools to stabilize the economy during the Covid-19 pandemic. This called for a fiscal response of unprecedented size, which added to the already large pre-crisis level of public debt. The increase in debt raises a number of questions: May these stimulus packages overheat the Euro Area economy? What are the implications for the sustainability of public debt, particularly in the event of rising interest rates? What are the policy challenges and options in response to a combination of inflation pressure and sustainability concerns? We use an estimated DSGE model for the Euro Area (and large member countries) that features risky long-term government debt and distortionary fiscal policy to shed light on these questions.

The COVID-19 outbreak has large impacts on labor market outcomes. We present novel real time survey evidence from the UK and the US showing that the impacts are highly unequal and exacerbate existing inequalities. Workers in alternative work arrangements and in occupations in which only a small share of tasks can be done from home are more likely to lose their jobs or experience falls in their income. Given that workers in these types of jobs had lower incomes to start with, low-income workers are hit hardest, widening existing inequalities in labor market outcomes. We further highlight the differential impacts by age, gender, race and education, and document individual perceptions about future job loss and job finding probabilities.

Olga Croitorov, Massimo Giovannini, Philipp Pfeiffer, Marco Ratto, Lukas Vogel

Abigail Adams-Prassl, Teoodora Boneva, Marta Golin, Christopher Rauh