Covid Economics 10, 27 April 2020: 1-23 Covid Economics Pandemics on Local Economic Growth
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COVID ECONOMICS VETTED AND REAL-TIME PAPERS ISSUE 10 THE GREAT INFLUENZA IN 27 APRIL 2020 ITALY Mario Carillo and Tullio Jappelli A SIMPLE NON-RECURSIVE MODEL Ernst-Ludwig von Thadden FALLEN ANGELS IN THE US OLG AS AN ALTERNATIVE Viral Acharya and Sascha Steffen TO SIR Michael Beenstock and Xieer Dai CONSUMPTION RESPONSES TO CARES SEVEN SCENARIOS Christopher Carroll, Edmund Crawley, Warwick McKibbin Jiri Slacalek and Matthew White and Roshen Fernando Covid Economics Vetted and Real-Time Papers Covid Economics, Vetted and Real-Time Papers, from CEPR, brings together formal investigations on the economic issues emanating from the Covid outbreak, based on explicit theory and/or empirical evidence, to improve the knowledge base. Founder: Beatrice Weder di Mauro, President of CEPR Editor: Charles Wyplosz, Graduate Institute Geneva and CEPR Contact: Submissions should be made at https://portal.cepr.org/call-papers- covid-economics-real-time-journal-cej. 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Hatton, University of Karen-Helene Ulltveit-Moe, Essex and CEPR University of Oslo and CEPR Ethics Covid Economics will publish high quality analyses of economic aspects of the health crisis. However, the pandemic also raises a number of complex ethical issues. Economists tend to think about trade-offs, in this case lives vs. costs, patient selection at a time of scarcity, and more. In the spirit of academic freedom, neither the Editors of Covid Economics nor CEPR take a stand on these issues and therefore do not bear any responsibility for views expressed in the journal’s articles. Covid Economics Vetted and Real-Time Papers Issue 10, 27 April 2020 Contents Pandemic and local economic growth: Evidence from the Great Influenza in Italy 1 Mario F. Carillo and Tullio Jappelli A simple, non-recursive model of the spread of Covid-19 with applications to policy 24 Ernst-Ludwig von Thadden The risk of being a fallen angel and the corporate dash for cash in the midst of COVID 44 Viral V. Acharya and Sascha Steffen Modeling the consumption response to the CARES Act 62 Christopher D. Carroll, Edmund Crawley, Jiri Slacalek and Matthew N. White The natural and unnatural histories of Covid-19 contagion 87 Michael Beenstock and Xieer Dai The global macroeconomic impacts of COVID-19: Seven scenarios 116 Warwick McKibbin and Roshen Fernando 1 Covid Economics Issue 10, 27 April 2020 Pandemic and local economic growth: Evidence from the Great Influenza in Italy1 Mario F. Carillo2 and Tullio Jappelli3 Date submitted: 21 April 2020; Date accepted: 23 April 2020 We investigate the link between the Great Influenza Pandemic of 1918 and regional economic growth in Italy. The pandemic caused 600,000 deaths in Italy, a death rate of about 1.2%. We find that going from regions with the lowest mortality to the ones with the highest mortality is associated with a decline in GDP per capita growth of about 6.5%, an effect that dissipated within three years. We find limited evidence of mechanisms that may uncover long-term effects of the pandemic, such as human capital accumulation and industrialization. The severity of the pandemic in the less developed regions of the country, along with the limited implementation or largely ineffective measures of central and local interventions by public authorities, point to our estimates as indicative of an upper bound of the transitory adverse effect of Covid Economics 10, 27 April 2020: 1-23 Covid Economics pandemics on local economic growth. 1 We thank Luigi Guiso for useful comments and MIUR for financial support (PRIN Grant N. 2017RHFXK4). 2 Postdoctoral Research Fellow, University of Naples Federico II. 3 Professor of Economics, University of Naples Federico II and CEPR Ressearch Fellow. COVID ECONOMICS VETTED AND REAL-TIME PAPERS 2 1 Introduction The COVID-19 pandemic induces policymakers to take urgent decisions on policy interventions to contain contagion and its adverse economic consequences. Such choices involve important trade-offs between the adverse economic effects of pandemic vis-à-vis those of the intervention. Yet, the economic consequences of pandemics are not fully clear, mostly because historically they have been typically attenuated by government interventions. We shed light on this issue by studying the effects of a pandemic on local economic activity by exploring the regional exposure to the 1918 Great Influenza Epidemic in Italy. The limited policy interventions undertaken over the Italian peninsula to contain the pandemic, along its heterogeneous exposure across the diverse regions of the country, provide a unique opportunity to estimate an upper bound of the potentially adverse effect of pandemic mortality on local economic growth. The 1918 influenza caused about 600,000 deaths in Italy, mostly concentrated between the end of September and the end of October. Mortality varied substantially across regions, ranging from less than 1% in Veneto to over 1.5% in Sicily and Calabria. This variability provides the ground for our identification of the effect of the health shock on subsequent GDP growth. To assess the GDP impact of the influenza we follow an approach similar to Barro et al. (2020), regressing regional GDP growth on flu mortality for various sample periods, ranging from 1900 to 1930, and controlling for other potential covariates, like war mortality, initial GDP and proxies for human capital. We find that the influenza contributed substantially to the difference performance of the Italian regions during the 1919-21 recession. Regions with the highest mortality rates experienced an excess GDP decline of about 6.5% relative to the lowest mortality regions. Using a distributed lag specification, we also find that the impact of the Covid Economics 10, 27 April 2020: 1-23 Covid Economics influenza was highest immediately after the pandemics, and that the effect vanished within 4 years. In the longer run (ten years and beyond), the statistical analysis does not reveal an economic effect of the influenza on manufacturing employment, and measures of human capital. These findings are qualitatively consistent with recent cross-country evidence by Barro et al. (2020), and country evidence for the US (Correia et al., 2020) and Denmark (Moller Dahl et al., 2020). From an economic point of view, they are consistent with a standard Solow growth model, where a reduction in the labor force leads to a recession. The historical accounts of the influenza reveal that the response of the health care system was inadequate in essentially all regions, and that lockdown measures were mild and ineffective. The results are therefore more helpful to understand the potential impact of an epidemic in a developing country with poor health infrastructure and limited ability to impose and enforce lockdown measures.