News and uncertainty about COVID-19: Survey evidence and short-run economic impact

by Alexander M. Dietrich (University of Tübingen, alexander.dietrich@uni-tuebingen.de),

Keith Kuester (University of Bonn, ECONtribute, keith.kuester@uni-bonn.de),

Gernot J. Müller (University of Tübingen, gernot.mueller@uni-tuebingen.de),

We solicit household expectations about the economic costs of the COVID-19 pan- demic. Households expect output to decrease by about 6 percent and inflation to increase by 5 percentage points in the 12 months following March 2020. We also document that the uncertainty about the overall effect is large, both at the level of individual respondents and in terms of the dispersion across respondents. To the extent that the economic fallout of COVID-19 has not fully materialized yet, but is still a) anticipated and b) uncertain it depresses private expenditure and pushes the natural rate of interest downward. In the second part of the paper we quantify this effect as we feed our the survey data in a standard business cycle model. We find that the natural rate drops by several percentage points and illustrate to what extent the short-run impact of COVID-19 depends on the response of monetary policy.

A Protective Shield for Europe’s Banks

by Moritz Schularick (University of Bonn, schularick@uni-bonn.de) and

Sascha Steffen, (Frankfurt School, S.Steffen@fs.de)

The 2008-2009 global financial crisis was a financial crisis that turned into an economic crisis. The current crisis is an economic crisis that could turn into a financial crisis. Importantly, it did not originate in the banking system that was overleveraged with bankers making bad decisions, or in the household sector that, too, was overleveraged. Instead, the virus and the unprecedented response governments are taking to contain its spreading, has an immediate impact on the real economy through the simultaneous occurrence of both demand and supply shocks. Liquidity quickly evaporates in financial markets. We are facing a global sudden stop of economic activity of unknown duration. The reality about the coming disruptions in the U.S. economy still has to sink in and the coming weeks will be very challenging in global financial markets.

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Studie (Englisch)