Unusual Shocks in our Usual Models

We propose a method to capture the unusual Covid recession and recovery in our usual business cycle models. The initial outbreak is represented by a new shock process which loads on wedges underlying the usual shocks and comes with news about its propagation. We apply our method to a standard model. The loadings are estimated with 2020q2 data; the evolving news is identified using professional forecasts. On net, the Covid shock is dominated by supply effects. It accounts for most of the early dynamics, was inflationary and a persistent drag on activity, and the majority of its effects were unanticipated.