Introduction

• Author: Efrem Castelnuovo
• DOI: http://doi.org/10.1111/1467-8462.12389
• Published date: 01 September 2020
• Date: 01 September 2020

The Australian Economic Review, vol. 53, no. 3, pp. 395–396 DOI: 10.1111/1467-8462.12389

Policy Forum: COVID-19 and the Business Cycle—Theory and

Evidence

Introduction

Efrem Castelnuovo*

The Australian economy has been hit hard

by the COVID‐19 shock. Lockdowns, social

distancing and self‐imposed restrictions have

representedasadnovelty since March 2020. As

a consequence, many businesses have suffered

in an unprecedented fashion. It is unclear how

long this will last—as a matter of fact, while

I am writing this Introduction to the September

2020 Policy forum of the Australian Economic

Review, Premier of Victoria, Dan Andrews, has

just declared a State of Disaster and imposed

Stage 4 restrictions in an attempt to bring down

the hard‐to‐reduce number of residents affected

by the coronavirus.

What does this mean for the Australian

economy? What can we do to limit the

business cycle costs due to the pandemic?

This Policy Forum collects three pieces that

address aspects of these questions.

Some lessons can be drawn by looking at

other economic realities. Pellegrino,

Ravenna and Züllig point out that business

and consumer confidence is at a pretty low

level in Europe at the moment. Importantly,

they show that an uncertainty shock like that

of COVID‐19, which is harmful per se,is

even more recessionary in the presence of an

environment characterised by a low level of

confidence. This high uncertainty/low con-

fidence toxic interaction can indeed generate

deep and prolonged recessions. Then, what

can policymakers do to limit the economic

costs of the COVID‐19 pandemic? Restore

confidence. Borrowing the wise words of

Pellegrino et al., policymakers have to "…

provide the public with contingent scenarios

and policies ready to be adopted if the

worst‐case epidemic outcomes materialise,

andclarifyhowtheywilllimitthedown-

side risk".

Restoring confidence is crucial to improve

an economic picture that is, at the moment,

certainly dismal. The dramatic drop in em-

ployment in the aftermath of the pandemic has

been a significant concern for Australian

policymakers. But when we talk about

employment, it is important to have a clear

picture of how different sectors can respond to

a common shock such as the current pan-

demic. Anderson, Caggiano, Vahid and Wong

contribute to our Policy Forum by proposing a

sectoral analysis of the Australian economy

that unveils the heterogeneous response across

sectors to the COVID‐19 shock. Their find-

ings point to the manufacturing and construc-

tion sectors as those that might generate the

largest positive spillovers for the rest of the

economy. Estimates of sector‐specificem-

ployment multipliers will be essential to

policymakers for the difficult calls they will

have to make in the months to come.

Another difficult decision for policymakers

is when and how to relax social distancing.

McDonald provides a theoretical analysis that

sheds light on the stimulatory and depressive

effects on economic activity due to the

relaxation of social distancing. Quite interest-

ingly, his position is that the net effect will

probably be depressive, a prediction that

prompts him to call for stimulatory fiscal

spending financed with an increase in taxes on

wealth and high incomes, and possibly for a

reduction in real wages. As usual, conclusions

drawn by theoretical investigations (as well as

* The University of Melbourne, Victoria 3010, Australia;

email <efrem.castelnuovo@unimelb.edu.au>.

© 2020 The University of Melbourne, Melbourne Institute: Applied Economic & Social Research,

Faculty of Business and Economics

Published by John Wiley & Sons Australia, Ltd