The coronavirus: Black swan and endowment shock

Abstract

An external shock caused by an extraordinary and unpredictable effect, a “black swan” like COVID-19, is analyzed. It implies a shift of endowment in financial markets, and its effects on economic inequality, financial deepening and total economic income. Theoretical models are proposed, where the public sector seeks alternatives to a lockdown, allowing self-regulation of the economy, taxing capital or seeking joint policies with other states. In the first model, the economy is self-regulating with the help of the financial sector. Nonetheless, inequality is generated and in other models, the public sector tries to intervene. First, the public sector minimizes inequality by taxing capital, allowing a redistribution of wealth and income, with a tax rate that depends only on the differential impacts of the black swan on the different markets. Finally, a coordination of policies between the different countries affected is proposed to prevent black swans and other negative externalities. This is feasible depending on the tax rate, household benefits and administration costs

Raising Interest Rates for Improving Income

“…Nonetheless, this impact turns into negative when the COVID-19 sub-sample is considered, and it is always significant. This means that, while in general the official interest rates hurts the employment of the economy, during the COVID times an increase in the interest rates would reduce un-employment, and then, help to reduce inequality because they are proxies (Cysne, 2009;Peña, 2021). According to this, it is empirically checked that rising reference rates could improve the economy during the COVID-19 pandemic, as in the B case of equation ( 29), because the most affected people in this pandemic have been small businesses that had to borrow, at least at the beginning, instead of the lowest-income people.…”

“…Following Peña (2021), consumers, which are families or households, provide capital to firms and banks, since they are the owners of the banks (household/consumers type 1, who work in the firm), and firms (household/consumers type 2, who work in the bank). The capital income for the households also follows the specification of Peña, as will be seen later, and depends on the pure interest rate, interest without fees, which is related to the reference interest rate.…”

“…The second part of this section considers the potential effects on income inequality of monetary policy during the current economic crisis provoked by the lockdown and the black swan of the COVID-19. The asymmetric effects of the COVID-19 in the different agents are based on the capital shocks of the simple model developed in Peña (2021). In this model, an endowment shock of the black swan is reflected as the capital income plus a negative shock u 2 , which is the same for all the agents and an asymmetric shock, , which is different for each agent i and is negative, between minus one and zero.…”

“…Next, it is considered that the agents with the lowest income, households 1, are the borrowers instead of consumers type 2, and the last ones are now the depositors. So, equations ( 11) and ( 22) would change into: (27) with the derivative or expected impact being as follows: (28) The impact is negative (…”