Macroeconomic Implications of COVID-19: Can Negative Supply Shocks Cause Demand Shortages?

Motivated by the effects of COVID-19 pandemic, we present a theory Keynesian supply shocks: shocks that reduce potential output in sector economy, but that, reducing demand other sectors, ultimately push aggregate activity below potential. A shock is more likely when elasticity substitution between sectors relatively low, intertemporal high, and markets are incomplete. Fiscal policy can display smaller multiplier, insurance benefit fiscal transfers be enhanced. Firm exits job destruction amplify propagate shock. (JEL D52, E23, E24, E32, E62, I12, I18)