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Pandemic shocks

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We introduce three pandemic shocks—impacting domestic households’ demand, external agents’ demand, and worldwide supply—in a standard general equilibrium model and devise a strategy to estimate those for Portugal. We setup a piecewise linear Kalman filter where lockdown disturbances have zero variance until 2019:4 and are estimated thereafter. Pandemic shocks are endowed with contemporaneous impacts on output 6–16 times greater than nonpandemic equivalents, and explain around 90 percent of the Gross Domestic Product forecast error variance up to 1 year. The first confinement wave is essentially marked by supply side perturbations (which in our model have also a demand-side flavor by affecting households’ expected income), i.e. an inability of firms to produce goods. The ensuing confinement waves rely more heavily on demand-side disturbances—domestic on a first stage and external on a second stage—i.e. an inability to consume goods. The productive sector seems to have become more resilient to COVID-19 effects throughout 2021 in line with a gradual recovery in supply disturbances on the aftermath of the collapse triggered by the first confinement period. In contrast, inflation is mostly determined by non-pandemic disturbances, particularly by costpush shocks.
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