The Long-Term Belief-Scarring Effects of COVID-19

September 24, 2021

Keynote Presentation by Julian Kozlowski

Presentation slides (PDF)

In October 2019, how likely did you think it was that a global pandemic would strike sometime in the next 10 years, let alone the next few months? In 2030, how will your answer have changed? Suppose that the COVID-19 crisis is over, effective vaccines have been used and the virus is contained—it’s history. Are we back to normal, with the economy fully recovered? Or are we in a new normal, with long-run, persistent effects?

In this recorded presentation Julian Kozlowski, senior economist at the St. Louis Fed, discusses how events such as the 2008 financial crisis and the current pandemic can permanently reshape our perceptions of macroeconomic risks and generate large and persistent effects. Following his presentation, Kozlowski is joined by fellow St. Louis Fed economist Miguel Faria-e-Castro, for a Q&A session.

  • (0:00) Introduction by David Benitez, senior coordinator at the St. Louis Fed
  • (1:10) Julian Kozlowski presents “The Long-Term Belief-Scarring Effects of COVID -19”
  • (2:03) Warm-up poll: Back to 2019 and forward to 2030
  • (5:42) Belief scarring
    • After seeing a tail event (a large negative shock), we change our expectations.
  • (6:07) Why would effects persist after the pandemic is contained?
  • (8:05) How can we measure belief changes?
    • Assigning probability to different events
    • Learning that the impossible is possible
  • (11:05) Measuring belief scarring
    • No one knows the true distribution of aggregate shocks
    • Frequencies of past events inform our estimated probabilities of future ones
    • How can we quantify these changes in beliefs?
  • (12:44) Measuring belief scarring … Before Tail Event
  • (13:04) Measuring belief scarring … After Tail Event
    • Tail events induce large changes in tail risk
    • Changes in tail risk are long-lived even without future crises
  • (13:45) Once bitten, twice shy.
  • (14:04) How do we quantify fear?
  • (14:24) A model to quantify scarring effects
  • 15:16) Average future output
    • No belief revisions – quick rebound
    • Belief scarring – persistent effects
  • (16:10) What is missing in this analysis?
    • Fiscal and monetary policy responses
  • (16:51) Fiscal stimulus
  • (18:34) Monetary policy: Total assets in central bank’s balance sheets
  • (20:32) Advanced vs. developing countries
  • (21:14) Deviation in GDP from pre-pandemic forecasts
  • (23:10) Conclusions
  • (25:09) David Benitez introduces Miguel Faria-e-Castro
  • (25:46) Panel discussion and Q&A
  • (56:08) Program concludes

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This popular lecture series addresses key issues and provides the opportunity to ask questions of Fed experts. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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