Understanding the COVID Economic Crisis: A Short- Run General Equilibrium Framework

Abstract

The article develops a static general equilibrium framework, in terms of which effects of the ongoing COVID-19 pandemic on output and employment of different sectors are analysed for a country like India where there are many regions, interregional migration and a large informal sector. In particular, three pandemic-induced shocks, namely, stoppage of interregional migration, supply bottlenecks and demand shrinkages are considered in a short-run set-up where prices and wages are rigid. It is shown that supply shocks in one region or sector generates binding demand constraints in others. Monetary transfer by the government increases employment and output. JEL Classifications: D5, E2