## The Long Economic Hangover of History

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**Canonical URL:** [The Long Economic Hangover of History](https://www.imf.org/-/media/files/publications/fandd/article/2020/june/long-term-economic-impact-of-pandemics-jorda.pdf)

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### Key findings
- Pandemics are associated with prolonged declines in the real (after-inflation) natural rate of interest.
- Following a pandemic, the natural rate response is tilted down by nearly 1.5 percentage points about 20 years later.
- It takes an additional 20 years for the natural rate to return to its original level after a pandemic.
- Wars produce the opposite effect: real interest rates tend to stay elevated for 30 to 40 years following wars.
- Real wages tend to rise gradually after pandemics; about 40 years after a pandemic, the real wage is about 10 percent higher.
- Possible mechanisms: loss of labor without parallel destruction of capital raises capital per unit of surviving labor; survivors may increase saving to rebuild wealth or out of greater frugality.

### Pandemics and macroeconomics (method and interpretation)
- Data: newly available yields of long-term sovereign debt stretching back to the 14th century (Schmelzing 2020) were used to estimate responses of the real natural rate after major pandemics.
- Definition: the natural (neutral) rate of interest is the equilibrium level that would keep the economy growing at its potential rate with stable inflation; it is determined by the relative demand and supply of loanable funds.
- Interpretation: declines in the natural rate after pandemics are consistent with a neoclassical growth model where a reduction in labor relative to capital lowers the marginal return to capital (real interest rates) and raises real wages.
- Contrasting events: major wars destroy capital as well as labor, tilting the interest-rate response up rather than down.

### Staggering magnitudes and persistence
- Pandemic impact on natural rate: tilted down by nearly 1.5 percentage points about 20 years after the event; requires another 20 years to revert.
- War impact on natural rate: elevated for 30 to 40 years in an economically and statistically significant way.
- Real wages: rise gradually after pandemics; 40 years out, the real wage is about 10 percent higher.

### Historical perspective — large pandemics (events with at least 100,000 deaths)
- Black Death; Start: 1331; End: 1353; Deaths: 75,000,000
- Italian Plague; Start: 1623; End: 1632; Deaths: 280,000
- Great Plague of Seville; Start: 1647; End: 1652; Deaths: 2,000,000
- Great Plague of London; Start: 1665; End: 1666; Deaths: 100,000
- Great Plague of Marseille; Start: 1720; End: 1722; Deaths: 100,000
- First Cholera Pandemic; Start: 1816; End: 1826; Deaths: 100,000
- Second Cholera Pandemic; Start: 1829; End: 1851; Deaths: 100,000
- Russia Cholera Pandemic; Start: 1852; End: 1860; Deaths: 1,000,000
- Global Flu Pandemic; Start: 1889; End: 1890; Deaths: 1,000,000
- Sixth Cholera Pandemic; Start: 1899; End: 1923; Deaths: 800,000
- Encephalitis Lethargica Pandemic; Start: 1915; End: 1926; Deaths: 1,500,000
- Spanish Flu; Start: 1918; End: 1920; Deaths: 100,000,000
- Asian Flu; Start: 1957; End: 1958; Deaths: 2,000,000
- Hong Kong Flu; Start: 1968; End: 1969; Deaths: 1,000,000
- H1N1 Pandemic; Start: 2009; End: 2010; Deaths: 203,000

### Net result and policy implications
- Historical pandemics have typically been followed by sustained periods—over multiple decades—with depressed real interest rates.
- Potential channels: lack of needed investment (excess capital per surviving worker), increased saving by survivors (caution or wealth rebuilding), or both.
- If historical trends repeat after COVID-19, secular stagnation concerns could persist for the next two decades or more.
- Factors likely to attenuate the decline in the natural rate after COVID-19:
  - The COVID-19 death toll relative to population could be smaller than some historical pandemics due to modern medical care and public health measures.
  - COVID-19 disproportionately affects the elderly, who are typically retired and tend to save more than the young—a key difference from past centuries.
  - Aggressive counter-pandemic fiscal expansion will boost public debt, reduce the national saving rate, and possibly put upward pressure on real interest rates.
- On net, the authors expect a sustained period of low real interest rates (though attenuated by the factors above).
- Policy implication: low real rates should provide fiscal space for governments to finance aggressive mitigation of pandemic consequences.

*Source: Jordà, Singh, and Taylor (2020).*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2020/june/long-term-economic-impact-of-pandemics-jorda.pdf_