Board of Governors of the Federal Reserve System

June 2020

Aggregate Demand and Aggregate Supply Effects of COVID-19: A Real-time Analysis

Geert Bekaert, Eric Engstrom, and Andrey Ermolov

Abstract:

We extract aggregate demand and supply shocks for the US economy from real-time survey data on inflation and real GDP growth using a novel identification scheme. Our approach exploits non-Gaussian features of macroeconomic forecast revisions and imposes minimal theoretical assumptions. After verifying that our results for U.S. post-World War II business cycle fluctuations are largely in line with the prevailing consensus, we proceed to study output and price fluctuations during the COVID-19 pandemic. We attribute two thirds of the decline in 2020:Q1 GDP to a negative shock to aggregate demand. In contrast, regarding the staggeringly large decline in GDP in 2020:Q2, we estimate two thirds of this shock was due to a reduction in aggregate supply. Statistical analysis suggests a slow recovery due to a persistent effects of the supply shock, but surveys suggest a somewhat faster rebound with a recovery in aggregate supply leading the way.
Accessible materials (.zip)

DOI: https://doi.org/10.17016/FEDS.2020.049

PDF: Full Paper