V-, U-, L-, or W-shaped economic recovery after COVID: Insights from an\n Agent Based Model

Abstract

We discuss the impact of a Covid-19--like shock on a simple model economy,\ndescribed by the previously developed Mark-0 Agent-Based Model. We consider a\nmixed supply and demand shock, and show that depending on the shock parameters\n(amplitude and duration), our model economy can display V-shaped, U-shaped or\nW-shaped recoveries, and even an L-shaped output curve with permanent output\nloss. This is due to the economy getting trapped in a self-sustained "bad"\nstate. We then discuss two policies that attempt to moderate the impact of the\nshock: giving easy credit to firms, and the so-called helicopter money, i.e.\ninjecting new money into the households savings. We find that both policies are\neffective if strong enough. We highlight the potential danger of terminating\nthese policies too early, although inflation is substantially increased by lax\naccess to credit. Finally, we consider the impact of a second lockdown. While\nwe only discuss a limited number of scenarios, our model is flexible and\nversatile enough to accommodate a wide variety of situations, thus serving as a\nuseful exploratory tool for a qualitative, scenario-based understanding of\npost-Covid recovery. The corresponding code is available on-line.\n