NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Insights from the Kennedy paper.
We’ve examined a 2006 paper on the economics of a pandemic co-written by now-Treasury Secretary Steven Kennedy, who sits on the Reserve Bank Board and has reportedly played a key role in shaping the government’s fiscal response to the COVID-19 pandemic.
Kennedy used a macroeconomic model to analyse the economic fall-out from a pandemic. The value of the work isn’t so much the numerical estimates, but rather how it highlights the linkages in the economy. The results suggest that the economy enters a deep recession, with confidence effects on spending, investment and hiring and a temporary reduction in labour supply causing most of the damage.
This means that the best macroeconomic policy response is to try to restore consumer and business confidence and promote a quick return to work. The paper also recommends supporting business cash flows, particularly in the service sector, and action that quickly stimulates demand. In this way, households and business can recover once the health crisis abates.
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