Macroeconomic Policy to Aid Recovery after Social Distancing for COVID-19
Australian Economic Review
; 53(3):415-428, 2020.
Article
| Wiley | ID: covidwho-756970
ABSTRACT
Abstract Using the Keynesian model set out in McDonald (2020), in which downward wage rigidity is supported by worker loss aversion with respect to wages, this article shows that a period of social distancing (SD) can leave a post-SD economy with both stimulatory and depressive effects. A loss of productive capacity is stimulating. Costs of restarting firms, lower labour productivity when restarted and a desire to restore wealth from debt incurred during the period of SD are depressive. If, as seems highly probable, the net effect on economic activity is negative then a fiscal expansion can restore activity. To avoid an increased government budget deficit, this expansion would probably require an increased tax rate. Reductions in real wages may also be necessary. A desire to balance the government budget combined with no increase in the tax rate would be unfortunate, because it would cause a further contraction in activity from its post-SD level.
Full text:
Available
Collection:
Databases of international organizations
Database:
Wiley
Journal:
Australian Economic Review
Year:
2020
Document Type:
Article
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