Summing up our findings, the great historical pandemics of the last millennium have typically been associated with subsequent low returns to assets, as far as the limited data allow us to conclude. These responses are huge. Smaller responses are found in real wages, but still statistically significant, and consistent with the baseline neoclassical model.
Measured by deviations in a benchmark economic statistic, the real natural rate of interest, these responses indicate that pandemics are followed by sustained periods—over multiple decades—with depressed investment opportunities, possibly due to excess capital per unit of surviving labor, and/or heightened desires to save, possibly due to an increase in precautionary saving or a rebuilding of depleted wealth. Either way, if the trends play out similarly in the wake of COVID-19 then the global economic trajectory will be very different than was expected only a few months ago.
Should we expect declines of 1.5%–2% in the real natural rate, however? There may be at least three factors that could possibly attenuate the decline of the natural rate predicted by our analysis, but their presence and magnitude is uncertain and unknowable until therapies to fight COVID-19 are more developed. First, the death toll of COVID-19 relative to the total population might be smaller than in the worst pandemics of the past, but we cannot know for sure at this point. Second, COVID-19 primarily affects the elderly, who are no longer in the labor force and tend to save relatively more than the young, so the demographic channels could be altered, although the recent pick up in infections is now affecting younger individuals. Third, aggressive counter-pandemic fiscal expansion will boost public debt further, reducing the national savings rate and this might put upward pressure on the natural rate, even though our analysis suggests that this expansion of public debt should be easier to sustain in the long-run.
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