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Macroeconomic Policy to Aid Recovery after Social Distancing for COVID‐19

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  • Ian M. McDonald

Abstract

Using the Keynesian model set out in McDonald (2020), in which downward wage rigidity is supported by worker loss aversion with respect to wages, this article shows that a period of social distancing (SD) can leave a post‐SD economy with both stimulatory and depressive effects. A loss of productive capacity is stimulating. Costs of restarting firms, lower labour productivity when restarted and a desire to restore wealth from debt incurred during the period of SD are depressive. If, as seems highly probable, the net effect on economic activity is negative then a fiscal expansion can restore activity. To avoid an increased government budget deficit, this expansion would probably require an increased tax rate. Reductions in real wages may also be necessary. A desire to balance the government budget combined with no increase in the tax rate would be unfortunate, because it would cause a further contraction in activity from its post‐SD level.

Suggested Citation

  • Ian M. McDonald, 2020. "Macroeconomic Policy to Aid Recovery after Social Distancing for COVID‐19," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(3), pages 415-428, September.
    • Handle: RePEc:bla:ausecr:v:53:y:2020:i:3:p:415-428
    DOI: 10.1111/1467-8462.12387
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    References listed on IDEAS

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    1. World Bank, 2020. "Global Economic Prospects, June 2020," World Bank Publications - Books, The World Bank Group, number 33748.
    2. World Bank, 2020. "Global Economic Prospects, January 2020," World Bank Publications - Books, The World Bank Group, number 33044.
    3. Olivier Blanchard, 2018. "Should We Reject the Natural Rate Hypothesis?," Journal of Economic Perspectives, American Economic Association, vol. 32(1), pages 97-120, Winter.
    4. Ian M. McDonald, 2017. "‘We Will End Up Being a Third Rate Economy … A Banana Republic’: How Behavioural Economics Can Improve Macroeconomic Outcomes," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 50(2), pages 137-151, June.
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    Cited by:

    1. Nana Liu & Zeshui Xu & Marinko Skare, 2021. "The research on COVID-19 and economy from 2019 to 2020: analysis from the perspective of bibliometrics," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 217-268, June.
    2. William F. Mitchell, 2020. "Debt and Deficits—A Modern Monetary Theory Perspective," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(4), pages 566-576, December.

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