As the Covid-19 coronavirus spreads throughout the globe, many economies encounter a negative shock. In this paper, I present a standard growth model that can illustrate the path of consumption, capital, output, and firm value during a pandemic crisis. I obtain the responses to the unanticipated shock and anticipated recovery. I find that only when the shock lasts long enough, consumption recovers before the productivity returns to the pre-crisis level. I explore the patterns of the change in firm value and its relation with the severity and persistence of the shock and the initial capital stock. Based on the stock market data, I find that the stock prices drop much more than what the model predicts and the stock markets on average have overreacted by about 25 percentage points....[ Read more ]

As the Covid-19 coronavirus spreads throughout the globe, many economies encounter a negative shock. In this paper, I present a standard growth model that can illustrate the path of consumption, capital, output, and firm value during a pandemic crisis. I obtain the responses to the unanticipated shock and anticipated recovery. I find that only when the shock lasts long enough, consumption recovers before the productivity returns to the pre-crisis level. I explore the patterns of the change in firm value and its relation with the severity and persistence of the shock and the initial capital stock. Based on the stock market data, I find that the stock prices drop much more than what the model predicts and the stock markets on average have overreacted by about 25 percentage points. And investors are too pessimistic about the pandemic, at least initially.