This paper addresses two theoretical questions: Can the COVID-19 supply shock lead to deficient demand? When — if at all — and how should governments intervene to correct for a recession? The authors have outlined a variety of conditions where a demand shortage leads to a reduction in output and employment that is larger than the supply shock itself (a Keynesian supply shock). Three factors would contribute to such deficient demand: 1) low substitutability, 2) incomplete markets and 3) constrained consumer liquidity.

The report also discusses the effects of various policies, arguing that the standard fiscal stimulus can be less effective. Additional models consider the effect of business closings, labour hoarding, and both private and public health concerns. The first best policy solution identified is to close down contact-intensive sectors and provide full insurance payments to affected workers.