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Forecasting During the COVID-19 Pandemic: A Structural Analysis of Downside Risk

Martin Bodenstein (FRB), Jay Faris (FRB), and Nils Goernemann (FRB)
FEDS Notes. Board of Governors of the Federal Reserve System, February 2021


The global collapse in economic activity triggered by individual and policy-mandated responses to the spread of COVID-19 is unprecedented both in scale and origin. At the time of writing, U.S. GDP is expected by professional forecasters to contract a staggering 6 percent over the course of 2020 driven by its 32 percent collapse in the second quarter (measured at an annual rate). The rest of the world is expected to suffer a similar decline. Using GEMUS, an estimated international macro model, we propose an analysis that distinguishes the direct effects implied by the path of the virus and the accompanying individual and policy responses from the indirect recessionary effects. Our analysis suggests that there is considerable downside risk to many of the publicly available forecasts.