COVID-19 and other pandemics: a literature review for economists

We provide a comprehensive review of the literature on the economic impact of pandemics and identify the transmission channels at play. The primary channel comes from the supply side, as pandemics reduce both the quantity and the quality of labour. They can also lead to a destruc-tion of capital, as businesses close and investment is curtailed. On the demand side, consump-tion is particularly vulnerable to the impact of both reduced income and declining consumer con-fidence. A third channel works through the financial system. While the natural rate of interest might be expected to fall, leading to a period of low interest rates, financial institutions are likely to come under stress. Rising uncertainty, along with an increase in the number of borrowers with debt servicing difficulties, may dampen investment and generate a liquidity squeeze, exacerbating the demand effects of the pandemic. All three channels work to reduce current and potential out-put. Spillovers and asymmetries can explain the varying impact of the pandemic across countries, but it seems that open economies, embedded in global value chains, are especially vulnerable. Nonetheless, the literature provides ample evidence on how to limit the impact of pandemics using monetary and fiscal policy combined with measures to ease liquidity constraints on the financial sector. In the context of the EU, the coordination and mutualisation of the policy response to the pandemic can prove to be very beneficial.