Not “Exogenous versus Endogenous Business Cycles: How the Pandemic differed from an Ordinary Recession.”

Reader Steven Kopits (who doesn’t know what a confidence interval is formally defined as, and thought no more than 300-400 people died in Hurricane Maria) urges me to write a paper with the above title.

I think I will turn the microphone over to others, who have written on this topic. From Econ 702 Section 2 (Spring 2020) (M.Sc. level):

  • Veronica Guerrieri, Guido Lorenzoni,  Ludwig Straub and Ivan Werning, “Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?” mimeo (April 2020). [link]
  • Slides for Guerrieri et al. [link].

I suspect this will be above Mr. Kopits’ head, so I link to Olivier Blanchard’s chapter on the pandemic.

  • Blanchard on Covid pandemic. [link]
  • Econ 442 Fall 2020 (undergraduate, Macro Policy) Lecture 12 slides [link]




28 thoughts on “Not “Exogenous versus Endogenous Business Cycles: How the Pandemic differed from an Ordinary Recession.”

  1. Steven Kopits

    Outdated. These are all from 2020, that is, from the depths of the pandemic.

    They do not address whether the Trump / Biden fiscal and monetary policies are too small, too big, or just right. They do not address the technical recession of H1 2022; they do not address the reason that a subsequent recession failed to arise despite expectations to that effect; the do not speak to the persistence of high interest rates, etc. They do not address the question of whether the covid recession should be treated like an ordinary recession, or something else. They do not clarify why seven years of zero interest rates after 2008 led to no material inflation or housing appreciation, while a few months of FFR at zero blew securities and house values through the roof. They do not make any statements regarding the normalization of labor markets. They do not make any mention of whether a tail-end overshoot should be expected or not, or the expected time to normalization.

    And, of course, they make no mention of the associated issues of political economy, for example, sustained high end consumption and a reasonable cratering of the middle income segment, nor the persistence of unaffordable housing.

    They are nice as they go, but they are both incomplete and out of date. I would call these papers more descriptive than theoretical. Nothing wrong with that, considering when they were written. But that was almost four years ago.

    1. pgl

      Outdated? Is the 1907 Theory of Interest by Irving Fisher outdated? You clearly never read it. Is General Theory written by Lord Keynes in 1936 outdated? Something else little Stevie has never read. How about the 1954 AER paper by E. Cary Brown on properly measuring fiscal impact? Oh wait – we know you have not read that either.

      Did you read ANY of these papers Dr. Chinn noted? I doubt it because had you done so, maybe just maybe you would end your stupid “suppression” parade.

    2. pgl

      “They do not address the technical recession of H1 2022”

      That is because we did not have a recession in 2022. I would ask you to read the posts on this very blog on this issue. But we know you will not as you are too preoccupied with your own bloviating. After all you were the moron who told us we did not have a Federal Reserve in 1918.

    3. pgl

      The COVID economic crisis. (additional chapter for “Macroeconomics, 8th edition).
      Olivier Blanchard, September 2020

      For Princeton Stupid Steve’s information – Blanchard is a highly respected macroeconomist. Which is to say even this excellent discussion is WAY over little Stevie’s little brain.

    4. Menzie Chinn Post author

      Steven Kopits: Just because the papers were written in 2020 doesn’t mean that they don’t explain how the shock struck and was propagated. By the way, the Guerreiri et al. paper was published in AER Pap&Proc. in 2022.
      You can find some papers on the covid aftermath if you look to some reputable economists (i.e., no zerohedge!) like Blanchard and Bernanke.

      1. pgl

        Gee – published 8 months ago. I wonder if Stevie would call this “outdated”:

        We answer the question posed by the title by specifying and estimating a simple dynamic model of prices, wages, and short-run and long-run inflation expectations. The estimated model allows us to analyze the direct and indirect effects of product-market and labor-market shocks on prices and nominal wages and to quantify the sources of U.S. pandemic-era inflation and wage growth. We find that, contrary to early concerns that inflation would be spurred by overheated labor markets, most of the inflation surge that began in 2021 was the result of shocks to prices given wages. These shocks included sharp increases in commodity prices, reflecting strong aggregate demand, and sectoral price spikes, resulting from changes in the level and sectoral composition of demand together with constraints on sectoral supply. However, although tight labor markets have thus far not been the primary driver of inflation, we find that the effects of overheated labor markets on nominal wage growth and inflation are more persistent than the effects of product-market shocks. Controlling inflation will thus ultimately require achieving a better balance between labor demand and labor supply.

        That seems to cover all the basics without once using the bogus term “suppression”. Little Stevie will likely refuse to read it.

    5. Macroduck

      This is just silly. You looked at the dates on only some of the papers, clearly didn’t take on board what was in them, and the cooked up a brand new qualification for what’s relevant to your “suppression vs recession” then “endogenous vs exogenous” rewrite. What you insist on calling suppression but the rest of the world calls a supply shock began ahead of the fiscal response. Now you say anything that doesn’t address the fiscal response isn’t germaine?

      Terrible. Transparently trying to change the subject.

    6. pgl

      Speaking of outdated – who kept pushing that outdated Quantity “Theory” which is not really a theory but might have some value if M2/GDP were relatively stable, which it has not been in over 30 year. Oh yea – it was Princeton Stupid Steve who kept telling us this was the only way to model inflation. That’s what one gets when one learns one’s macroeconomics from Bert and Ernie.

  2. pgl

    I have to wonder whether little Stevie knows what exogenous or endogenous even means. We know JohnH has no clue what these terms mean and if there is someone dumber than Jonny boy, it’s little Stevie.

  3. pgl

    Macroeconomic Implications of COVID-19:Can N egative Supply Shocks Cause Demand Shortages?
    Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván Werning
    April 2, 2020

    We present a theory of Keynesian supply shocks: supply shocks that trigger changes in aggregate demand larger than the shocks themselves. We argue that the economic shocks associated to the COVID-19 epidemic—shutdowns, layoffs, and firm exits—may have this feature. In one-sector economies supply shocks are never Keynesian. We show that this is a general result that extend to economies with incomplete markets and liquidity constrained consumers. In economies with multiple sectors Keynesian supply shocks are possible, under some conditions. A 50% shock that hits all sectors is not the same as a 100% shock that hits half the economy. Incomplete markets make the conditions for Keynesian supply shocks more likely to be met. Firm exit and job destruction can amplify the initial effect, aggravating the recession. We discuss the effects of various policies. Standard fiscal stimulus can be less effective than usual because the fact that some sectors are shut down mutes the Keynesian multiplier feedback. Monetary policy, as long as it is unimpeded by the zero lower bound, can have magnified effects, by preventing firm exits. Turning to optimal policy, closing down contact-intensive sectors and providing full insurance payments to affected workers can achieve the first-best allocation, despite the lower per-dollar potency of
    fiscal policy.

    With that abstract one would think Princeton Stevie boy would definitely read this important paper. But NOOO – Stevie reads the date it was written and dismisses it in its entirety. Yea – Stevie is that kind of clown.

  4. JohnH

    “China builds up electric power in Gobi and western deserts equal to half US capacity”

    Yep, China is obviously going down the drain, just as the foreign policy blob and its neocon echo chamber would have you believe.

    And they would also have you believe that the US won the latest Taiwan election…except for one problem that didn’t garner many headlines: “Taiwan’s KMT opposition secures speaker’s chair and strengthens power to check next president William Lai’s policies on mainland China” Maybe Taiwan can still avoid the fate of becoming yet another Washington proxy state and hosting another pointless and futile US quagmire!

    1. Macroduck

      Taking over for ltr in her absence? “Yay China” to what purpose? To pretend China’s current economic circumstances are other than they are?

      Yes, China is still building stuff. And yes, China’s economy is struggling.

      1. pgl

        Does little Jonny boy get the fact that China’s population is 4 times that of the US? Or maybe the little boy does not know how to calculate anything in per capita terms. After all, division is something only 6 year olds understand. But not little Jonny boy.

      2. Ivan

        And good for them building useful infrastructure instead of useless empty apartment buildings “savings accounts”. But is it to a scale that will replace the 30-40% of their economy that was construction. How will it replace the local city governments income from selling lands. Good for them that they are replacing dirty coal energy with clean energy – but the structural disasters in their economy are still present and don’t get solved by this. How and where should the Chinese people place savings. How should local governments be funded. Serious questions that should be answered by serious people.

    2. pgl

      Energy use (btu’s) per capita by nation. I guess little Jonny boy could not be bothered to check the data but it seems the us has 3 times the electricity per capita than Jonny’s advanced China. OK, the US ranks only 11th by world standards but Jonny’s advanced China is ranked 54th.

      Of course China has almost 1.4 billion people so electricity use in absolute terms likely leads the world. And doing this in per capita terms requires doing division which something little Jonny boy has not learned how to do.

  5. pgl

    BTW – what is an “ordinary recession”? I guarantee that Princeton Stupid Steve has no idea. Let’s go back in time:

    The Great Recession which was driven by the Great Financial Crisis and the collapse of the housing market.

    The first Bush43 recession which occurred in large part from the decline of the Internet, Communication, Telecom boom.

    The Bush41 recession which in my mind was in part because of financial issues from things like the S&L crisis and the slowness of the FED to lower interest rates.

    The Reagan recession which was all Volcker all the time (with the commentary that Volcker was overreacting to Reagan’s fiscal fiasco).

    The Ford recession which was due to dumb macroeconomic policies and those stupid WIN buttons.

    To begin to suggest that each of these were the same thing is so stupid that only little Stevie can lump them together.

  6. JohnH

    Larry Summers says odds are “meaningful” that the Fed’s next rate move is a bump higher.

    It’s fascinating how Ducky and pgly bleat about how workers are being hurt about high interest rates coexisting with very low unemployment and rising real wages. Of course, if high interest rates do eventually start to increase unemployment, there are ways to provide an immediate fix and maintain aggregate demand as well. As we learned from COVID stimulus, more generous unemployment benefits and an increase in EITC actually work…but Ducky and pgly ignore those approaches in favor of lower interest rates…which immediately boost the asset portfolios of the usual suspects.

    1. pgl

      I leave it to Moses to mock your citing of Summers. Instead I will point out just a couple of things in your own link that little Jonny forgot to read:

      “It’s always a mistake to over-interpret one month’s number — and that’s especially true in January, where calculating seasonality is difficult,” he said.

      Oh wait – Jonny boy has been working overtime over interpreting this month’s number. But come Jonny boy – could you not bother to read the opening bullet points where Summers said there was only 15% chance the FED will nudge interest rates up. Heck I bet there is a 15% chance you get something right sometime this decade. Then again – I’m not putting money down on such a foolish bet.

    2. pgl

      “more generous unemployment benefits and an increase in EITC actually work”

      And the chance that the Speaker of the House would even let this get to the floor for a vote are less than Summer’s little 15% chance that the FED will nudge interest rates.

      Hey Jonny boy – the Vegas casinos want you to visit them as they are drooling over the prospect of taking your life’s savings.

      1. JohnH

        The usual pgl nonsense…If he might recall, Democrats and Republicans came together in 2020 to pass the CARES act, which boosted unemployment benefits and the EITC. So why not start promoting and laying the political groundwork for future fiscal policy to assure demand stabilization? If your real goal is really to help workers, as pgl and Ducky claim they want to do, why not promote policies that work to help them immediately rather than at some point in the distant future?

        Lowering interest rates immediately boosts asset values and the wealth of Wall Street investors. And since Ducky and pgly promote interest rate cuts under the guise of “helping workers,” at the exclusion of better ways to really help those hurt by unemployment, you have yet more evidence that they are Wall Street shills, interested primarily in making the fat cats obese.

    3. Macroduck

      Here’s a classic Johnny mumble:

      “Of course, if high interest rates do eventually start to increase unemployment, there are ways to provide an immediate fix and maintain aggregate demand as well.”

      Johnny is wrong on two counts. First, if unemployment rises, damage has already been done. Employment is already down, which lowers demand, which induces more job loss. Rinse and repeat. Johnny is saying that he’s willing to sacrifice other people’s jobs to his fetish.

      Second, help isn’t immediate. Once again, Johnny is simply wrong about how the economy works. The effects of monetary policy are long and variable. Action today has real economic consequences over months or years, not today. Fiscal policy? Does anyone believe that this Congress is going to move quickly on fiscal policy? The Speaker of the House is campaigning for a full-year continuing budget resolution so that nothing good actually happens in fiscal policy this year. Election year, remember.

      1. pgl

        “Action today has real economic consequences over months or years, not today. Fiscal policy? Does anyone believe that this Congress is going to move quickly on fiscal policy? The Speaker of the House is campaigning for a full-year continuing budget resolution so that nothing good actually happens in fiscal policy this year.”

        Me thinks little Jonny boy thinks Pelosi is still Speaker. He is that incredibly dumb.

      2. pgl

        “if unemployment rises, damage has already been done.”

        Jonny boy loves to cite Stiglitz even as little Jonny boy never has a clue what Stiglitz has actually said. Let’s go back 22 years when we had that allegedly mild 2001 recession. Stiglitz was saying the output gap was near 4% which drove the Bushies crazy. Of course the Bushies like Kudlow had to blame the government deficits on something which led Kudlow the Klown to write the insane “deficit dance” which somehow put the output gap near 20%. Yea Kudlow is almost as stupid as little Jonny boy.

        But let’s say we have a recession that creates a 4% output gap in 2024. That would create a $1 trillion reduction from potential GDP. You can redistribute that all you want but in the real world everyone loses from such a disaster. But little Jonny boy would dismiss a $1 trillion loss as pocket change.

  7. pgl

    Kevin Drum asks an interesting question:

    What did Republicans know and when did they know it?

    We now know that:

    Alexander Smirnov lied to prosecutors about Burisma paying $5 million bribes to Hunter and Joe Biden.
    These lies started in June 2020.
    Smirnov began an extensive series of meetings with Russian intelligence officials in 2019.
    Smirnov’s accusations were a key part of Republican charges of corruption against the Biden family.
    Draw your own conclusions. At this point, the question is: What did Republican investigators know about all this and when did they know it?

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