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Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19

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  • Julian Kozlowski
  • Laura Veldkamp
  • Venky Venkateswaran

Abstract

The largest economic cost of the COVID-19 pandemic could arise if it changed behavior long after the immediate health crisis is resolved. A common explanation for such a long-lived effect is the scarring of beliefs. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long-run effect of the COVID crisis depends crucially on whether bankruptcies and changes in habit make existing capital obsolete. A policy that avoided most permanent separation of workers from capital could generate a much larger benefit than originally thought, that could easily be 180% of annual GDP, in present value.

Suggested Citation

  • Julian Kozlowski & Laura Veldkamp & Venky Venkateswaran, 2020. "Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19," Working Papers 2020-009, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:87869
    DOI: 10.20955/wp.2020.009
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    More about this item

    Keywords

    COVID-19; coronavirus; rare events; tail risks; belief-driven business cycles;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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