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

TL;DR

This paper uses an agent-based model to explore various post-Covid economic recovery shapes, analyzing the effects of shocks and policies like credit easing and helicopter money on recovery outcomes.

Contribution

It introduces a flexible agent-based model to simulate different recovery shapes and assesses policy impacts on economic resilience after Covid-like shocks.

Findings

Recovery shape depends on shock parameters and can be V, U, W, or L.

Easing credit and helicopter money can effectively mitigate shocks.

Premature policy termination risks causing permanent output loss.

Abstract

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