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The longer-run economic consequences of pandemics

The longer-run economic consequences of pandemics

The COVID-19 pandemic is having immediately visible effects on economic activity. The rapid contraction in economic activity, the collapse of trade, and the dramatic increase in the unemployment rate are without precedent. However, pandemics also have less well-understood, longer-run effects on the natural rate of interest – a critical economic barometer and policy marker. This column reveals how historical data since the 14th century on the 15 largest pandemics suggests the real natural rate could drop by close to 1.5 percentage points over the next 20 years, a decline similar to that seen since the 1980s. There are still reasons for guarded optimism about the final death toll of COVID-19 and thus its ultimate economic impact. Perhaps this time may be different.