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Working Papers, No. 2022-39, September 2022 Crossref
Unusual Shocks in Our Usual Models

(Revised April 30, 2024)

We propose a method to allow usual business cycle models to account for the unusual Covid-19 episode. The pandemic and the public and private responses to it are represented by a new shock called the Covid shock, which loads onto wedges that underlie the usual shocks and comes with news about its evolution. We apply our method to a standard medium-scale model, estimating the loadings with 2020q2 data and the evolving news using professional forecasts. It accounts for most of the early macroeconomic dynamics, was inflationary and a persistent drag on activity, and the majority of its effects were unanticipated. We also show how the Covid shock can be used estimate DSGE models with data before, during, and after the pandemic.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.


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