The impact of COVID-19 confinement in the Euro Area: a Bayesian DSGE approach

Abstract

With the aim of providing a preliminary forecast of the economic repercussion of the recent confinement, we estimate a canonical medium-scale dynamic stochastic general equilibrium model (DSGE) for the Euro Area economy, augmented with financial frictions. Relying on such characterisation of the economy, we carry out a series of simulations in which we use a shock to the labour supply as the primary conductor of the consequences of this pandemic disturbance. Moreover, we assess the adequacy of quantitative easing policies that many central banks are adopting as a measure to counterbalance the economic damage caused by COVID-19. We conclude that these initiatives serve as an immediate response, but they are limited by central banks’ infation target and should be accompanied by other measures able to speed up the recovery in the medium and long run.