THE ECONOMIC IMPACT OF PANDEMICS: REAL AND FINANCIAL
TRANSMISSION CHANNELS
Hiona Balfoussia
Bank of Greece
Heather D. Gibson
Bank of Greece
Dimitris Malliaropulos
Bank of Greece and University of Piraeus
Dimitris Papageorgiou
Bank of Greece
Abstract
We explore the economic
impact of the pandemic and the importance of real and financial sector linkages
in this context. We explicitly model the financial sector and trace its role in
propagating the pandemic shocks. We find that the pandemic-induced adverse
labour supply shock can have sizable effects on the real economy, which are
further propagated through the banking sector. Moreover, the contemporaneous pandemic-induced
financial shock has financial, but also real effects, including high and
protracted firm bankruptcies as well as a more fragile banking sector, thus
hindering the financing of the real economy. The duration of the pandemic
matters for its impact on the macroeconomy, as both business investment and
bank balance sheets take disproportionately longer to recover. Our findings
underline the need for well-targeted policy measures to support the real
economy and, secondarily, the financial sector during the pandemic and provide
justification for several of the policy initiatives recently taken by
governments, central banks and regulatory institutions around the world.
Keywords: COVID-19, pandemic,
lockdown, social distancing, uncertainty, propagation
JEL classification: E2, E3, E5, G1
Acknowledgements:
We would like to thank S.
Degiannakis, P. Migiakis and the participants of a Bank of Greece seminar for
their useful comments. The views expressed in this paper are those of the
authors and not necessarily those of either the Bank of Greece or the
Eurosystem.
Correspondence:
Dimitris Malliaropulos
Economic Analysis and Research Department,
Bank of Greece,
21 El. Venizelos Av.,
10250 Athens, Greece
Tel.:0030-210-3202380
Fax: 0030-210-3203939
Email: dmalliaropulos@bankofgreece.gr