Covid-19 And Progress In Economic Theory

There are numerous competing economic theories, all of which lack empirical proof. With the slow evolution of main economic parameters like GDP, unemployment, inflation, etc. it is very hard to find real drivers behind the evolution and most popular theories are based on a stochastic approach - the future is not predictable, which small addition of real economic parameters. Even the largest 2008 economic crisis did not give any clear understanding of the actual economic reasons causing the slump. This is likely due to the dominance of endogenous factors of the economic crises. Despite its cruelty, the COVID-19 pandemic is a great driver of exogenous impact on the global and national economies. The strength of economic problems varies between countries and gives a large number and diversity of structural responses to the COVID-19 external impact - the actual links between various economic parameters have to be revealed. This is an excellent opportunity to test all economic theories, conventional and non-conventional, and the theories matching actual behavior of the economies (winners) have to survive and be praised. 

It is a chance for everybody to prove their models/theories. The failure of economics as a science in 2008 gave birth to a broader discussion on the role of data, theories, and models for a better understanding of the global economy. After a decade of re-thinking, it is time to explain (i.e. predict) the immediate reaction to the sudden and unprecedented fall in employment. 

Our model shows that the drop in the labor force in the USA will be followed by a deflation period. This result does not depend on the trillions of dollars poured into the US economy. The deflation effect lags behind the drop in the labor force by approximately two years. It is worth noting that the previous 4 trillion pushed into the US economy after 2008 did not affect the low inflation rate.  

Disclosure: None. 

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