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Effects of Covid-19 on Euro Area GDP and Inflation: Demand vs. Supply Disturbances

Kollmann, Robert (2021): Effects of Covid-19 on Euro Area GDP and Inflation: Demand vs. Supply Disturbances.

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Abstract

This paper analyzes the macroeconomic effects of the Covid-19 epidemic on Euro Area (EA) GDP and inflation, using a stylized New Keynesian model. Covid is interpreted as a combination of aggregate demand and aggregate supply disturbances. Offsetting aggregate demand and supply changes are shown to account for the stability of EA inflation, in the face of Covid. The evidence presented here indicates that Covid-induced aggregate demand and supply shifts were persistent. An aggregate supply contraction is identified as the dominant force driving the sharp fall of EA GDP in 2020.

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