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The Cost of Coronavirus Uncertainty: The High Returns to Clear Policy Plans

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  • Giovanni Pellegrino
  • Federico Ravenna
  • Gabriel Züllig

Abstract

Policymakers face an extremely uncertain environment during COVID‐19. Using a nonlinear VAR estimate for the Euro Area, we argue that the benefit of reducing policy uncertainty at a time dominated by pessimistic expectations amounts to several points of GDP. The impact on the economy of uncertainty shocks is much larger during periods of negative outlook for the future. We estimate the impact on industrial production of the current COVID‐19 induced uncertainty to peak at a year‐over‐year growth loss of −15.4 per cent in September 2020, and to lead to a fall in CPI inflation between 1 per cent and 1.5 per cent. Policies providing state‐contingent scenarios ready to be adopted if the worst‐case outcomes materialise can reduce the impact of uncertainty.

Suggested Citation

  • Giovanni Pellegrino & Federico Ravenna & Gabriel Züllig, 2020. "The Cost of Coronavirus Uncertainty: The High Returns to Clear Policy Plans," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(3), pages 397-401, September.
    • Handle: RePEc:bla:ausecr:v:53:y:2020:i:3:p:397-401
    DOI: 10.1111/1467-8462.12383
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