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Disequilibrium propagation of quantity constraints: application to the COVID lockdowns

Published online by Cambridge University Press:  12 December 2022

Antoine Mandel  and
Vipin P. Veetil
Antoine Mandel*
Affiliation:
Centre d’Economie de la Sorbonne, Paris School of Economics, Université Paris 1 Pantheon-Sorbonne, Maison des Sciences Économiques, Paris, France
Vipin P. Veetil
Affiliation:
Economics Area, Indian Institute of Management, Kozhikode, Kerala, India
*
*Corresponding author. Email: antoine.mandel@univ-paris1.fr. Phone: +33144078271/+33658793688.
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Abstract

This paper develops a network economy model to study the propagation of the COVID lockdown shock. Firms are related to each other through buyer–seller relations in the market for intermediate inputs. Firms choose production levels and input combinations using prices that emerge from local interactions. Nothing forbids trade at out-of-equilibrium prices. In such a setting, disequilibrium spills over from one market to another due to the interconnections between markets. These disequilibrium dynamics are capable of generating unemployment when workers released by contracting firms are not frictionlessly absorbed by expanding firms. We calibrate the model to the US economy using a data set with more than 200,000 buyer–seller relations between about 70,000 firms. Computational experiments on the calibrated economy suggest that the COVID lockdown generates a sizeable decline in GDP. The endogenously generated unemployment dynamics is a primary determinant of the cost of the lockdown.

Keywords

Agent-based modeldisequilibriumCOVID lockdownlabor dynamics
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2110 - 2136
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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