13.04.2022 • 8/2022
From Pandemic to Energy Crisis: Economy and Politics under Permanent Stress
The German economy is steering through difficult waters and faces the highest inflation rates in decades. In their spring report, the leading German economic research institutes revise their outlook for this year significantly downward. The recovery from the COVID-19 crisis is slowing down as a result of the war in Ukraine, but remains on track. The institutes expect GDP to increase by 2.7% and 3.1% in 2022 and 2023 respectively. In the event of an immediate interruption to Russian gas supplies, a total of 220 billion euros in German economic output would be at risk in both years.
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17.03.2022 • 6/2022
Price shock jeopardises recovery of German economy
Russia’s war in Ukraine is hitting the German economy primarily via an energy price shock, but also by disrupting trade flows and causing general uncertainty. At the same time, however, the economy is receiving a strong boost from the lifting of many pandemic restrictions. The Halle Institute for Economic Research (IWH) forecasts that gross domestic product will increase by 3.1% in 2022. The consumer price index will be 4.8% higher than one year ago. The war affects the East German eco-nomy about as hard as the economy in Germany as a whole.
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Resolving the Missing Deflation Puzzle
Journal of Monetary Economics,
A resolution of the missing deflation puzzle is proposed. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinear model fails to do so. In addition, our nonlinear model reproduces the skewness of inflation and other macroeconomic variables observed in post-war U.S. data. All told, our results caution against the common practice of using linearized models to study inflation and output dynamics.
Inequality in Life and Death
IMF Economic Review,
We argue that 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 preexisting 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.
Without Russian Gas, a Sharp Recession Looms in Germany
The German economy is steering through difficult waters. Tail winds from fading pandemic restrictions, supply-side bottlenecks in the aftermath of the coronavirus crisis, and shock waves caused by the war in Ukraine are dragging the economy in opposing directions. The common factor is the price-driving effect. Abruptly stopping gas deliveries from Russia to the European Union would drive the German economy into a deep recession. In this case, the accumulated loss of overall economic output would amount to 220 billion euro by the end of 2023.
The Macroeconomics of Epidemics
Review of Financial Studies,
We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size of the associated recession. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the United States.