Disequilibrium Propagation of Quantity Constraints: Application to the COVID Lockdowns
24 Pages Posted: 9 Jul 2020 Last revised: 11 Oct 2021
Date Written: October 2021
Abstract
This paper develops a network economy model to study the propagation of the COVID lockdown shock. Firms are related to each other through buyer-seller relations in the market for intermediate inputs. Firms choose production levels and input combinations using prices that emerge from local interactions. Nothing forbids trade at out-of-equilibrium prices. In such a setting, disequilibrium spills over from one market to another due to their interconnections. These disequilibrium dynamics are capable of generating unemployment when labor released by contracting firms are not frictionlessly absorbed by expanding firms. We calibrate the model to the US economy using a data set with more than 200,000 buyer-seller relations between about 70,000 firms. Computational experiments on the calibrated economy suggest that the COVID lockdown will cost around 15-30% of annual GDP. The rate at which unemployed workers find new jobs is the primary determinant of the cost of the lockdown.
Keywords: Economic Network, Disequilibrium, Unemployment, COVID Lockdown, Agent-based Model
JEL Classification: J60, D50, D57
Suggested Citation: Suggested Citation