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WORKING PAPER: Scarring Body and Mind: The Long-Term Belief-Scarring Effects of COVID-19


by Julian KozlowskiLaura Veldkamp, and Venky Venkateswaran
Posted online April 15, 2020

Abstract: The largest economic cost of the COVID-19 pandemic could arise if it changed behavior long after the immediate health crisis is resolved. A common explanation for such a long- lived effect is the scarring of beliefs. We show how to quantify the extent of such belief changes and determine their impact on future economic outcomes. We find that the long- run effect of the COVID crisis depends crucially on whether bankruptcies and changes in habit make existing capital obsolete. A policy that avoided most permanent separation of workers from capital could generate a much larger benefit than originally thought, that could easily be 180% of annual GDP, in present value.

For the full paper in PDF form, click here.


Federal Reserve Bank of St. Louis working papers are preliminary materials circulated to stimulate discussion and critical comment.

  

© 2020, Federal Reserve Bank of St. Louis. These views do not reflect the opinion of the Federal Reserve Bank of St. Louis or the Federal Reserve System. 


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