A Demand Systems Approach to Understanding Medium-Term Post-Pandemic Consumption Trends

Abstract

Recent research has documented the immediate negative impact of the COVID-19 pandemic on household and business consumption, but there is still limited investigation into the medium-term effects in specific consumption categories. This paper addresses this gap using a vector autoregression analysis of a system of aggregated consumer final demand across Australia. We highlight the importance of studying a demand system, as opposed to investigating independent consumption categories, due to the interactive evolution of consumption during the pandemic. Modelling the paths of various consumption categories in response to shocks from one another, we find that, despite the large and abrupt shocks to consumption during the first two quarters of 2020, most categories reverted to pre-COVID levels when restrictions were lifted. Importantly, transportation had the largest and most persistent decline. Overall, shocks to sectors other than food, alcohol and education were outside the counterfactual forecast confidence intervals estimated based on pre-COVID information.