The 2020 Pandemic: Economic repercussions and policy responses

• Author: Lucjan T. Orlowski
• DOI: http://doi.org/10.1002/rfe.1123
• Published date: 01 January 2021
• Date: 01 January 2021

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wileyonlinelibrary.com/journal/rfe Rev Financ Econ. 2021;39:20–26.

© 2020 University of New Orleans

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INTRODUCTION

I shall begin by noting the most serious, devastating effect of the current COVID-19 pandemic crisis, which is the global loss

of 972 thousand lives, including over 200 thousand deaths in the United States (by September 22, 2020). This dire outcome

is irreversible and more painful than the economic repercussions of the COVID-19 virus that are the subject of our analysis.

The underlying notion of this study is that the current pandemic crisis has not damaged physical capital stock, but it has

inflicted serious, long-lasting injuries to the labor force. The crisis has triggered deep structural adjustments in the labor market,

strengthening job creation in health care, information technology, and various types of on-line services, while reducing jobs in

travel, manufacturing, retail sales, recreation, and many other business areas. From the macroeconomic perspective, the current

pandemic crisis is a special case of a “sudden stop,” that is, a massive disruption of economic activity. For financial markets

and institutions, this crisis can be viewed as a special case of a “Minsky moment,” that is, a sudden decline of optimism among

financial investors that entails a market correction and economic recession.1

It is challenging if not impossible to predict the full magnitude of the economic and financial stability outcomes of the

2020 pandemic, as this is a unique systemic event that does not have a cyclical character and it has very few and rather remote

episodes of historical resemblance. This study argues that repercussions of the current pandemic depend directly on the identi-

fication gap, which is defined in this study as the difference between the actual, existing infections and the officially detected

and reported cases. It further asserts that this crisis should have been anticipated and counteracted with a set of predetermined,

targeted policy responses. This conclusion is derived from discussions of prior virus episodes addressed in the literature.

A recognition and identification path of pandemic episodes are modeled and explained in Section II. The pronounced effects

of COVID-19 on the U.S. labor force are evidenced and discussed in Section III. The impact on the stability of financial markets

is examined in Section IV. The concluding Section V summarizes our key findings and proposes selected policy responses.

Received: 8 September 2020

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Revised: 17 September 2020

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Accepted: 19 September 2020

DOI: 10.1002/rfe.1123

ORIGINAL ARTICLE

The 2020 Pandemic: Economic repercussions and policy

responses

Lucjan T.Orlowski

Sacred Heart University, Fairfield, CT,

USA

Correspondence

Lucjan T. Orlowski, Economics, Sacred

Heart University, 5151 Park Avenue,

Fairfield, CT 06825, USA.

Email: OrlowskiL@sacredheart.edu

Abstract

This paper analyses the economic and financial repercussions of the 2020 COVID-19

pandemic. It argues that the pandemic has inflicted serious injuries to the labor force

but has not damaged the physical capital stock. Therefore, the resolution policies of

this crisis ought to be carefully tailored to supporting structural adjustments to the

labor market. The analysis asserts that the impact of the pandemic crisis is exacer-

bated by the identification gap between the unobserved and the officially reported

cases of COVID-19. The gap increases financial risks, including market-, credit-,

default-, and foreign exchange risks.

KEYWORDS

financial stability, identification gap, pandemic crisis, structural adjustment policies

JEL CLASSIFICATION

G01; J63; J68