Veronica Guerrieri, Guido Lorenzoni, Ludwig Straub, Iván Werning
The Covid-19 pandemic and the policies taken to control its spread have many features of an aggregate supply shock, as workers who stay home are prevented from producing goods and services. This column argues that when a supply shock asymmetrically affects different sectors of the economy, it can produce a contraction in demand even larger than the original shock, leading to deflationary pressures. This is due to complementarities across sectors and the fact that workers in different sectors are differentially affected and lack insurance.
