Pandemic, Shutdown and Consumer Spending: Lessons from Scandinavian Policy Responses to COVID-19

TL;DR

This study analyzes how social distancing laws and the virus itself affected consumer spending during COVID-19 in Scandinavia, revealing most economic decline was due to the virus, with laws having a nuanced impact based on age and health risk.

Contribution

It provides empirical evidence disentangling the effects of social distancing laws from the virus on consumer spending using Scandinavian data.

Findings

Most of the economic contraction was caused by the virus itself.

Social distancing laws increased the decline in spending for low-risk individuals.

Laws attenuated the decline for high-risk individuals by reducing virus prevalence.

Abstract

This paper uses transaction data from a large bank in Scandinavia to estimate the effect of social distancing laws on consumer spending in the COVID-19 pandemic. The analysis exploits a natural experiment to disentangle the effects of the virus and the laws aiming to contain it: Denmark and Sweden were similarly exposed to the pandemic but only Denmark imposed significant restrictions on social and economic activities. We estimate that aggregate spending dropped by around 25 percent in Sweden and, as a result of the shutdown, by 4 additional percentage points in Denmark. This implies that most of the economic contraction is caused by the virus itself and occurs regardless of social distancing laws. The age gradient in the estimates suggest that social distancing reinforces the virus-induced drop in spending for low health-risk individuals but attenuates it for high-risk individuals by lowering the overall prevalence of the virus in the society.