The Economic Cost of COVID Lockdowns: An Out-of-Equilibrium Analysis

Abstract

This paper estimates the cost of the lockdown of some sectors of the world economy in the wake of COVID-19. We develop a multi sector disequilibrium model with buyer-seller relations between agents located in different countries. The production network model allows us to study not only the direct cost of the lockdown but also indirect costs which emerge from the reductions in the availability of intermediate inputs. Agents determine the quantity of output and the proportions in which to combine inputs using prices that emerge from local interactions. The model is calibrated to the world economy using input-output data on 56 industries in 44 countries including all major economies. Within our model, the lockdowns are implemented as partial reductions in the output of some sectors using data on sectoral decomposition of capacity reductions. We use computational experiments to replicate the temporal sequence of the lockdowns implemented in different countries. World output falls by 7% at the early stage of the crisis when only China is under lockdown and by 23% at the peak of the crisis when many countries are under a lockdown. These direct impacts are amplified as the shock propagates through the world economy because of the buyer-seller relations. Supply-chain spillovers are capable of amplifying the direct impact by more than two folds. Naturally, the substitutability between intermediate inputs is a major determinant of the amplification. We also study the process of economic recovery following the end of the lockdowns. Price flexibility and minor technological adaptations help in reducing the This article is part of the Topical Collection on Economics of COVID-19 Mandel acknowledges support from the H2020 framework programme via grant 884565 -TIPPING.plus Mandel acknowledges the support by the Project ExSIDE. This work has received funding from the European Union's Horizon 2020 research and innovation programme under the Marie 36 Sk lodowska-Curie grant agreement No 721846, "Expectations and Social Influence Dynamics in Economics (ExSIDE)".

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