News and uncertainty about the economic fallout of COVID-19: Survey evidence and implications for monetary policy

a column by Alexander Dietrich (University of Tuebingen, Germany), Keith Kuester (University of Bonn, Germany), Gernot Müller (University of Tübingen, Germany and CEPR) and Raphael Schoenle (Brandeis University, USA and Federal Reserve Bank of Cleveland, USA) for VOX: CEPR’s Policy Portal

The effects of the COVID-19 pandemic on the global economy are still largely unknown. The short-term economic impact will depend importantly on people’s expectations of the overall effect, and the amount of uncertainty thereof.

This column uses a survey of US households to show that the expected economic effect is negative, large, and highly uncertain. An asset-pricing equation is used to quantify the implication of these expectations for the natural rate of interest. The natural rate declines by several percentage points, suggesting a role for monetary accommodation to (partially) offset the shock.

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Labels:
uncertainty, growth, monetary_policy, natural_rate_of_interest, news_shocks,

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