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

September 24, 2021

Keynote Presentation by Julian Kozlowski

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

Articles and Blog Posts on Belief Scarring/Tail Risk

Economic Synopses: COVID-19: Scarring Body and Mind (Dec. 22, 2020)
Open Vault blog: Rolling an Imaginary Die and Measuring Beliefs about Risk (Nov. 11, 2020)
Economic Synopses – Three-part series:
- Tail Risk: Part 1, The Persistent Effects of the Great Recession (Aug. 5, 2019)
- Tail Risk: Part 2, The Missing Recovery After the Great Recession (Aug. 6, 2019)
- Tail Risk: Part 3, The Return on Safe and Liquid Assets (Aug. 7, 2019)

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

Keynote Presentation by Julian Kozlowski

Articles and Blog Posts on Belief Scarring/Tail Risk

Other Articles, Blog Posts and Publications