Welfare

New Keynesian economics

Elasticity (physics)

Multiplier (economics)

Monetary policy

Internal medicine

Philosophy

Macroeconomics

Pathology

Demand shock

Composite material

Economics

Keynesian economics

Materials science

Economic shortage

Aggregate demand

Government (linguistics)

Production (economics)

Disease

Fiscal multiplier

Shock (circulatory)

Government spending

Coronavirus disease 2019 (COVID-19)

Market economy

Linguistics

Infectious disease (medical specialty)

Fiscal policy

Monetary economics

Post-Keynesian economics

Medicine

Supply shock

Elasticity of substitution

American Economic Review

Motivated by the effects of the COVID-19 pandemic, we present a theory of Keynesian supply shocks: shocks that reduce potential output in a sector of the economy, but that, by reducing demand in other sectors, ultimately push aggregate activity below potential. A Keynesian supply shock is more likely when the elasticity of substitution between sectors is relatively low, the intertemporal elasticity of substitution is relatively high, and markets are incomplete. Fiscal policy can display a smaller multiplier, but the insurance benefit of fiscal transfers can be enhanced. Firm exits and job destruction can amplify and propagate the shock. (JEL D52, E23, E24, E32, E62, I12, I18)

Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?