In response to How Coronavirus Affects the Economy

Daniel Tenreiro had a pretty thorough and succinct review of the possible ways an epidemic could harm the economy, but there’s one more worth adding. Almost everything he mentioned would register as a negative supply shock for the U.S. economy — but the repercussions could include a negative demand shock as well. If disruption to supply chains and so forth reduce the economy’s natural interest rate and the Federal Reserve does not act to bring interest rates down itself, the result will be an inappropriate tightening of monetary policy. That’s a second-order economic effect of the shock, but in practice it could end up being bigger than the first-order effect.


Update: Scott Sumner agrees–or rather, I agree with him, since he wrote first.