The macroeconomics of a pandemic: A minimalist framework*

Luis Felipe Céspedes, Roberto Chang, Andrés Velasco

Research output: Contribution to journalReview articlepeer-review

2 Scopus citations


To analyze the macroeconomics of a pandemic we build a minimalist framework with two essential components. The first is productivity-related: if the virus forces firms to shed labor beyond a certain threshold, productivity suffers. The second component is a credit market imperfection: because lenders cannot be sure a borrower will repay, they only lend against collateral. Expected productivity determines collateral value; in turn, collateral value can limit borrowing and productivity. As a result, adverse shocks have large magnification effects, in an unemployment and asset price deflation doom loop. There may be multiple equilibria, so that pessimistic expectations can push the economy to a bad equilibrium with limited borrowing and low employment and productivity. The model helps identify policies to fight the effects of the pandemic. Traditional expansionary fiscal policy has no beneficial effects, while cutting interest rates has a limited effect if the initial real interest rate is low. By contrast, several unconventional policies, including wage subsidies, helicopter drops of liquid assets, equity injections, and loan guarantees, can keep the economy in a high-employment, high-productivity equilibrium. Such policies can be fiscally expensive, so they are feasible only with ample fiscal space or emergency financing from abroad. Preliminary macroeconomic evidence is consistent with the mechanisms in our model.

Original languageEnglish (US)
Article number102674
JournalJournal of International Money and Finance
StatePublished - Oct 2022
Externally publishedYes

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics


  • Covid economics
  • Financial frictions
  • Pandemics and economic policy


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