COVID ECONOMICS VETTED AND REAL-TIME PAPERS ISSUE 20 20 MAY 2020 REAL-TIME EVIDENCE OF THE PLUNGE INTO RECESSION Olivier Coibion, Yuriy Gorodnichenko AMBIGUITY AVERSION AND and Michael Weber DISTORTED BELIEFS RELIGIOSITY Giulia Piccillo and Job Van Den Hurk Jeanet Sinding Bentzen LABOUR SHOCKS: DEMAND OR MENTAL HEALTH SUPPLY? Annie Tubadji, Frédéric Boy Pedro Brinca, Joao B. Duarte and Don J. Webber and Miguel Faria-e-Castro 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. Other queries should be sent to [email protected]. Copyright for the papers appearing in this issue of Covid Economics: Vetted and Real-Time Papers is held by the individual authors. The Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research (CEPR) is a network of over 1,500 research economists based mostly in European universities. The Centre’s goal is twofold: to promote world-class research, and to get the policy-relevant results into the hands of key decision-makers. CEPR’s guiding principle is ‘Research excellence with policy relevance’. A registered charity since it was founded in 1983, CEPR is independent of all public and private interest groups. It takes no institutional stand on economic policy matters and its core funding comes from its Institutional Members and sales of publications. Because it draws on such a large network of researchers, its output reflects a broad spectrum of individual viewpoints as well as perspectives drawn from civil society. CEPR research may include views on policy, but the Trustees of the Centre do not give prior review to its publications. The opinions expressed in this report are those of the authors and not those of CEPR. Chair of the Board Sir Charlie Bean Founder and Honorary President Richard Portes President Beatrice Weder di Mauro Vice Presidents Maristella Botticini Ugo Panizza Philippe Martin Hélène Rey Chief Executive Officer Tessa Ogden Editorial Board Beatrice Weder di Mauro, CEPR Timothy J. Hatton, University of Charles Wyplosz, Graduate Institute Essex and CEPR Geneva and CEPR Ethan Ilzetzki, London School of Viral V. Acharya, Stern School of Economics and CEPR Business, NYU and CEPR Beata Javorcik, EBRD and CEPR Abi Adams-Prassl, University of Sebnem Kalemli-Ozcan, University Oxford and CEPR of Maryland and CEPR Rik Frehen Jérôme Adda, Bocconi University Tom Kompas, University of and CEPR Melbourne and CEBRA Guido Alfani, Bocconi University and Anton Korinek, University of CEPR Virginia and CEPR Franklin Allen, Imperial College Philippe Martin, Sciences Po and Business School and CEPR CEPR Oriana Bandiera, London School of Warwick McKibbin, ANU College of Economics and CEPR Asia and the Pacific Michele Belot, European University Kevin Hjortshøj O’Rourke, NYU Institute and CEPR Abu Dhabi and CEPR David Bloom, Harvard T.H. Chan Evi Pappa, European University School of Public Health Institute and CEPR Nick Bloom, Stanford University and Barbara Petrongolo, Queen Mary CEPR University, London, LSE and CEPR Tito Boeri, Bocconi University and Richard Portes, London Business CEPR School and CEPR Markus K Brunnermeier, Princeton Carol Propper, Imperial College University and CEPR London and CEPR Michael C Burda, Humboldt Lucrezia Reichlin, London Business Universitaet zu Berlin and CEPR School and CEPR Luis Cabral, New York University Ricardo Reis, London School of and CEPR Economics and CEPR Paola Conconi, ECARES, Universite Hélène Rey, London Business School Libre de Bruxelles and CEPR and CEPR Giancarlo Corsetti, University of Dominic Rohner, University of Cambridge and CEPR Lausanne and CEPR Fiorella De Fiore, Bank for Moritz Schularick, University of International Settlements and CEPR Bonn and CEPR Mathias Dewatripont, ECARES, Paul Seabright, Toulouse School of Universite Libre de Bruxelles and Economics and CEPR CEPR Flavio Toxvaerd, University of Barry Eichengreen, University of Cambridge California, Berkeley and CEPR Christoph Trebesch, Christian- Simon J Evenett, University of St Albrechts-Universitaet zu Kiel and Gallen and CEPR CEPR Antonio Fatás, INSEAD Singapore Karen-Helene Ulltveit-Moe, and CEPR University of Oslo and CEPR Francesco Giavazzi, Bocconi Jan C. van Ours, Erasmus University University and CEPR Rotterdam and CEPR Christian Gollier, Toulouse School of Thierry Verdier, Paris School of Economics and CEPR Economics and CEPR Rachel Griffith, IFS, University of Manchester and CEPR Ethics Covid Economics will feature 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 articles. Submission to professional journals The following journals have indicated that they will accept submissions of papers featured in Covid Economics because they are working papers. Most expect revised versions. This list will be updated regularly. American Economic Review Journal of Economic Growth American Economic Review, Applied Journal of Economic Theory Economics Journal of the European Economic American Economic Review, Insights Association* American Economic Review, Journal of Finance Economic Policy Journal of Financial Economics American Economic Review, Journal of International Economics Macroeconomics Journal of Labor Economics* American Economic Review, Journal of Monetary Economics Microeconomics Journal of Public Economics American Journal of Health Economics Journal of Political Economy Economic Journal Journal of Population Economics Economics of Disasters and Climate Quarterly Journal of Economics* Change Review of Economics and Statistics International Economic Review Review of Economic Studies* Journal of Development Economics Review of Financial Studies Journal of Econometrics* (*) Must be a significantly revised and extended version of the paper featured in Covid Economics. Covid Economics Vetted and Real-Time Papers Issue 20, 20 May 2020 Contents Lockdowns, macroeconomic expectations, and consumer spending 1 Olivier Coibion, Yuriy Gorodnichenko and Michael Weber In crisis, we pray: Religiosity and the Covid-19 pandemic 52 Jeanet Sinding Bentzen Narrative economics, public policy and mental health 120 Annie Tubadji, Frédéric Boy and Don J. Webber The surprising effect of social distancing on our perception: Coping with uncertainty 143 Giulia Piccillo and Job Van Den Hurk Measuring sectoral supply and demand shocks during Covid-19 158 Pedro Brinca, Joao B. Duarte and Miguel Faria-e-Castro 1 Covid Economics Issue 20, 20 May 2020 The cost of the COVID-19 crisis: Lockdowns, macroeconomic expectations, and consumer spending1 Olivier Coibion,2 Yuriy Gorodnichenko3 and Michael Weber4 Date submitted: 16 May 2020; Date accepted: 17 May 2020 We study how the differential timing of local lockdowns due to COVID-19 causally affects households’ spending and macroeconomic expectations at the local level using several waves of a customized survey with more than 10,000 respondents. About 50% of survey participants report income and wealth losses due to the corona virus, with the average losses being $5,293 and $33,482 respectively. Aggregate consumer spending dropped by 31 log percentage points with the largest drops in travel and clothing. We find that households living in counties that went into lockdown earlier expect the unemployment rate over the next twelve months to be 13 percentage points higher and continue to expect higher unemployment at horizons of three to five years. They also expect lower future inflation, Covid Economics 20, 20 May 2020: 1-51 Covid Economics report higher uncertainty, expect lower mortgage rates for up to 10 years, and have moved out of foreign stocks into liquid forms of savings. The imposition of lockdowns can account for much of the decline in employment in recent months as well as declines in 1 We thank the National Science Foundation for financial support in conducting the surveys. We also thank Shannon Hazlett and Victoria Stevens at Nielsen for their assistance with the collection of the PanelViews Survey. Results in this article are calculated based on data from The Nielsen Company (US), LLC and marketing databases provided by the Kilts Center for Marketing Data Center at The University of Chicago Booth School of Business. Information on availability and access to the data is available at http://research.chicagobooth.edu/ nielsen. We thank Peter McCrory for sharing data on the timing of lockdowns. 2 Professor of Economics at UT Austin. 3 Professor of Economics at UC Berkeley. 4 Professor of Finance at the University of Chicago. Copyright: Olivier Coibion, Yuriy Gorodnichenko and Michael Weber COVID ECONOMICS VETTED AND REAL-TIME PAPERS 2 Covid Economics Issue 20, 20 May 2020 consumer spending. While lockdowns have pronounced effects on local economic conditions and households’ expectations, they have little impact on approval ratings