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Usual Shocks in our Usual Models

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Abstract

We propose an event-study research design to identify the nature and propagation of large unusual shocks in DSGE models and apply it to study the macroeconomic effects of the Covid shock. The initial outbreak is represented as the onset of a new shock process where the shock loads on wedges associated with the model's usual shocks. Realizations of the Covid shock come with news about its propagation, allowing us to disentangle the role of beliefs about the future of the pandemic. The model attributes a crucial role to the novel Covid shock in explaining the large contraction in output in the second quarter of 2020 and the rebound in growth expected at the same time. The Covid shock loads significantly on wedges that generate both demand and supply effects but, on net, supply forces dominate. The effects of Covid on hours worked are quite persistent, although the successive pandemic waves (e.g., the Delta wave) have a progressively smaller impact on the macroeconomy. Our methods provide a foundation to estimate structural models with data that include the pandemic without having to specify a micro-founded epidemiological block.

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  • Filippo Ferroni & Jonas D. M. Fisher & Leonardo Melosi, 2022. "Usual Shocks in our Usual Models," Working Paper Series WP 2022-39, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:95171
    DOI: 10.21033/wp-2022-39
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    2. Faria, Gonçalo & Verona, Fabio, 2024. "Enhancing forecast accuracy through frequencydomain combination: Applications to financial and economic indicators," Bank of Finland Research Discussion Papers 14/2024, Bank of Finland.
    3. Shi, Jiping, 2025. "News Uncertainty and Signaling Effects of Monetary Policy," Warwick-Monash Economics Student Papers 81, Warwick Monash Economics Student Papers.
    4. Garcia-Revelo, José & Levieuge, Grégory & Sahuc, Jean-Guillaume, 2025. "Revisiting 15 years of unusual transatlantic monetary policies," Journal of International Money and Finance, Elsevier, vol. 159(C).
    5. Stefan Hohberger, 2025. "Germany’s macroeconomic drivers during the pandemic and inflation surge," International Economics and Economic Policy, Springer, vol. 22(1), pages 1-49, February.
    6. Lansing, Kevin J., 2024. "Replicating business cycles and asset returns with sentiment and low risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 167(C).

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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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