Real Business Covid, revisited

Back in May 2020, I'd noted that a lot of what was going on looked an awful lot more like an adverse supply shock than like a traditional Keynesian demand shock, and that the two need different treatment.

What are the stylised facts of the current mess, at least for NZ?

• Massive negative technological shock across a broad range of sectors meaning that existing combinations of labour and capital are far less productive than they once were. Restaurants need more space to accommodate the same number of clients, or fewer clients in the same space. Factories, meatpacking plants, and offices need more spacing between workers. Some of this shock will be temporary - we will eventually get to Alert Level 1. But even then some of the shock will be longer-lasting: the international arrivals lounge will be very different when folks coming in from Covid-places have to shunt over to a quarantine facility and have to be kept separate from those coming in from Australia. 
• A collapse in tourism that feels a lot more like a huge negative price shock to an export commodity than it does like any domestic aggregate demand problem. If world milk prices dropped by 95%, we wouldn't dream of trying to solve it with domestic "drink more milk!" campaigns.
• Supply chain issues that also feel like a negative tech shock.
• A shock to work arrangements for office types now more able to work from home; many of us will take advantage of it for as long as possible, with consequent effects on demand for lunches in town. This isn't a normal kind of AD shock - just giving people more money wouldn't increase demand for lunches in town when people prefer to work from home and are now allowed to do so. Some of this could persist for a long time if firms have discovered that a lot of workers are no less productive when working from home and prefer working from home.  
• Jump in unemployment consequent to all of that.
• Oh, and a massive drought in some dairying parts of the country - the exemplar RBC shock. 
• Shifts in consumer demand to online. 

Am I missing anything there? None of that would argue for accidentally contractionary monetary policy - RBNZ needs to keep us within the inflation bounds. 

But this is way different from the GFC. We could yet get GFC messes out of Europe, but I don't think we're there yet. Fingers crossed. The underlying problem is a massive terrible tech shock. And that puts us into RBC land.

Sharon Zoellner provides the ex-post evaluation:

Zollner​ said ANZ analysts predicted inflation would peak at 7.4 per cent this year.

With the Russian invasion of Ukraine further entangling global supply chains, and the Omicron variant present in key trading partner China, tough times were ahead for the economy, she said.

“The upshot of all of this is we are seeing a highly inflationary negative supply shock, not a very deflationary negative net demand shock. Oops, because the central banks responded as if it was the latter,” Zollner​ said.

Remember that the 2021 RBNZ Annual Report mentioned carbon more often than it mentioned inflation. Carbon shows up 23 times. Inflation, 19 (including the four mentions of price stability).