The researchers were able to use long-term interest rate data and other sources to look at the economic impact of these and another 12 pandemics.
They found “significant macroeconomic after-effects” from pandemics that lasted for 40 years.
A line engraving by Marc Antonio Raimondi shows the suffering of a town in Europe during the bubonic plague outbreak in the Middle Ages. Natural interest rates remained lower than normal in the wake of the outbreak.
“Following a pandemic, the natural rate of interest declines for decades thereafter, reaching
its nadir about 20 years later, with the natural rate about 150 basis points lower had the pandemic
not taken place,” they found.
“At about four decades later, the natural rate returns to the level it would be expected to have had the pandemic not taken place.
“These results are staggering and speak of the disproportionate effects on the labor force
relative to land (and later capital) that pandemics had throughout centuries.”
There’s a long history of research showing particularly deep recessions caused by financial crises, such as the 2008-09 global financial crisis, can depress interest rates and general economic activity for up to 10 years.
Interest rates have been found to stay lower than normal for around a decade in the wake of a financial crisis. But new research shows that in the wake of a pandemic, rates could remain low for up to 40 years.Credit:AP
Interest rates around the world have never returned to their pre-GFC highs despite unemployment falling to decade-low levels in many nations.
But the researchers found in the wake of pandemics which kill large numbers of people, the economic impacts linger for much longer.
They said pandemics are followed by extended periods of falling investment, which keeps downward pressure on interest rates, while survivors have a heightened desire to save as they seek to rebuild lost wealth or protect themselves for future turmoil.
Another outcome is that due to a reduction in the overall working population, real wages actually increase.
Pandemics have a much different impact than wars. Post-war reconstruction boosts economies and pushes up interest rates.
Governments around the world have sharply increased borrowing levels to deal with the economic fallout from the coronavirus outbreak, prompting concern about how the debt will be repaid.
But the researchers found this may not be as big a problem as feared.
“If the trends play out similarly in the wake of COVID-19 — adjusted to the scale of this pandemic — the global economic trajectory will be very different than was expected only a few weeks ago,” they found.
“If low real interest rates are sustained for decades they will provide welcome fiscal space for governments to mitigate the consequences of the pandemic.
“The major caveat is that past pandemics occurred at time when virtually no members of society survived to old age. The Black Death and other plagues hit populations with the great mass of the age pyramid below 60, so this time may be different.”
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Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.
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