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Effects of Covid-19 on Euro Area GDP and Inflation: Demand vs. Supply Disturbances

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  • Robert Kollmann

Abstract

This paper analyzes the macroeconomic effects of the Covid-19 epidemic on Euro Area (EA) GDP and inflation, using a stylized New Keynesian model. Covid is interpreted as a combination of aggregate demand and aggregate supply disturbances. Offsetting aggregate demand and supply changes are shown to account for the stability of EA inflation, in the face of Covid. The evidence presented here indicates that Covid-induced aggregate demand and supply shifts were persistent. An aggregate supply contraction is identified as the dominant force driving the sharp fall of EA GDP in 2020.

Suggested Citation

  • Robert Kollmann, 2021. "Effects of Covid-19 on Euro Area GDP and Inflation: Demand vs. Supply Disturbances," Working Papers ECARES 2021-12, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:eca:wpaper:2013/325393
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    More about this item

    Keywords

    Covid; real activity; inflation; aggregate demand; aggregate supply;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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