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The Economic Ripple Effects of a Temporary Shutdown

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Listed:
  • Pablo Andrés Neumeyer
  • Francisco J. Buera
  • Roberto N. Fattal Jaef
  • Hugo Hopenhayn
  • Yongseok Shin

Abstract

We analyze the economic ripple effects of a temporary shutdown, such as those experienced during the Covid-19 pandemic. Using a model incorporating financial and labor market frictions, we explore how varying magnitudes and durations of shutdowns impact output, employment, and firm dynamics. We find that the effects are not persistent if workers on temporary layoffs can be recalled without frictions and if government policies effectively protect the balance sheets of financially constrained firms. With imperfect insurance, young firms are disproportionately affected. Additionally, we find that recovery is more prolonged if shutdowns are accompanied by other shocks that cause additional reallocation within or across industries. Although motivated by the Covid-19 pandemic, the model can be applied to other large, temporary shocks such as wars, cyber-attacks/outages, and natural disasters.

Suggested Citation

  • Pablo Andrés Neumeyer & Francisco J. Buera & Roberto N. Fattal Jaef & Hugo Hopenhayn & Yongseok Shin, 2025. "The Economic Ripple Effects of a Temporary Shutdown," Department of Economics Working Papers 2025_06, Universidad Torcuato Di Tella.
    • Handle: RePEc:udt:wpecon:2025_06
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    References listed on IDEAS

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