News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact

45 Pages Posted: 15 Apr 2020

See all articles by Alexander Dietrich

Alexander Dietrich

University of Tübingen

Keith Keuster

University of Bonn

Gernot J. Müller

University of Tuebingen - Department of Economics

Raphael Schoenle

Brandeis University

Date Written: April 10, 2020

Abstract

We survey households about their expectations of the economic fallout of the COVID-19 pandemic, in real time and at daily frequency. Our baseline question asks about the expected impact on output and inflation over a one-year horizon. Starting on March 10, the median response suggests that the expected output loss is still moderate. This changes over the course of three weeks: At the end of March, the expected loss amounts to some 15 percent. Meanwhile, the pandemic is expected to raise inflation considerably. The uncertainty about these effects is very large. In the second part of the paper we feed the survey data into a New Keynesian business cycle model. Because the economic costs of the pandemic have not fully materialized yet but are nonetheless (a) anticipated and (b) uncertain, private expenditure collapses, thereby amplifying and bringing forward in time the economic costs of the pandemic. The short-run economic impact of the pandemic depends critically on whether monetary policy accommodates the drop in the natural rate of interest or not.

Keywords: COVID-19, corona, household expectations, survey, news shocks, uncertainty, natural rate, monetary policy, zero lower bound

JEL Classification: C83, E43, E52

Suggested Citation

Dietrich, Alexander and Kuester, Keith and Müller, Gernot J. and Schoenle, Raphael, News and Uncertainty about COVID-19: Survey Evidence and Short-Run Economic Impact (April 10, 2020). FRB of Cleveland Working Paper No. 20-12, Available at SSRN: https://ssrn.com/abstract=3573123 or http://dx.doi.org/10.2139/ssrn.3573123

Alexander Dietrich

University of Tübingen ( email )

Germany

Keith Kuester

University of Bonn ( email )

Regina-Pacis-Weg 3
Postfach 2220
Bonn, D-53012
Germany

Gernot J. Müller

University of Tuebingen - Department of Economics ( email )

Mohlstrasse 36
D-72074 Tuebingen, 72074
Germany

Raphael Schoenle (Contact Author)

Brandeis University ( email )

Waltham, MA 02454
United States

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