The Great Lockdown: information, noise and macroeconomic fluctuations

Abstract

This paper argues that noisy information about lockdown can cause undesired economic fluctuations. We construct a New Keynesian model with imperfect information about how long the lockdown would last. On the one hand, a false information about the lockdown being persistent (which we call fear of lockdown) lowers consumption, investment, employment and output. We show that the fear of lockdown may account for more than half of the decline in economic activity caused by the lockdown itself. On the other hand, a true information about lockdown being introduced can also be misinterpreted and hence cause an impact on the economy being smaller than desired by the authorities. These undesired fluctuations can be reduced if communication about lockdown policy is precise, for which our policy conclusion calls