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As we head into a new year, this much is patently clear: COVID-19 is not just going to disappear, as outgoing U.S. President Donald Trump repeatedly suggested it would. Although there has been a substantial economic recovery from the depths of the initial lockdowns last spring, the losses to GDP and employment around the world are enough to make this the second- or third-worst downturn of the last 100 years. And this is true even as it appears increasingly clear that an effective vaccine is in the offing.

Even then, returning to normal will take time, raising the question of how much damage will be incurred in the interim. The answer will depend on the economic policies that major countries pursue in the coming months. There is already significant potential for hysteresis (long-lasting) effects. Household and firm balance sheets that have been eviscerated will be restored only gradually; firms that have gone bankrupt during the pandemic will not suddenly become “un-bankrupt” when the virus is brought under control.

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