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COVID beliefs could cause long-term scars on St. Louis economy, fed official says

"Large, unexpected shocks do create a shift in expectations and this 'belief scarring' effect," a senior economist said
The Gateway Arch towers over the St. Louis skyline on a dreary, rainy day, Thursday, Feb. 24, 2011 in St. Louis. (AP Photo/Tom Gannam)

ST. LOUIS — The COVID-19 pandemic could leave lasting effects on the economy if a shift in confidence and fear prevent firms and consumers from returning to their previous investment and spending habits, said a senior economist at the Federal Reserve Bank of St. Louis.

There are two reasons for this scenario, said Julian Kozlowski, whose presentation Friday was part of the series, “Dialogue with the Fed: Beyond today's financial headlines.”

The first factor is the "direct effect," the ongoing risk of contracting COVID-19 in day-to-day activities. The second is what Kozlowski called “belief scarring,” which he defined as a persistent change in thinking about the probability of an extreme, negative shock to the economy. He referred to it as "once bitten, twice shy."

“In a sense, this is learning that the impossible is possible. A regular recession, something that is expected in a sense, does not shift our observations too much," he said.

Credit: Federal Reserve Bank of St. Louis

Kozlowski, who joined the St. Louis Fed in 2018 and has a Ph.D. in economics from New York University, referred to the pandemic and the resulting deep, but short, recession as a “tail event,” something that has a small probability of occurring. He compared it to the recession from 2007 to 2009, another “tail event” that prompted people to reassess taking risks and contributed to the slow economic recovery.

"Large, unexpected shocks do create a shift in expectations and this 'belief scarring' effect," he said.

Read the full story on the St. Louis Business Journal website.

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