Abstract: COVID-19 can cause short-term economic downturns by affecting the labor market, but standard macroeconomic models lack in-depth understanding of its economic effects and internal transmission mechanisms. By embedding labor supply shock and the disaster risk shock which affect total factor productivity and labor productivity into a dynamic stochastic general equilibrium model, this paper analyzes the mechanism and effect of COVID-19 on the national economy. The findings are as follows. Firstly, different from the normal disaster risk shocks, demand-side recession is caused by supply-side shocks. The impact of COVID-19 doesn’t manifiest as substantial loss of capital, but as the reduction of labor input and the decline of enterprise productivity. Secondly, the epidemic also has a negative impact on the operation of the national economy, resulting in economic stagnation in short-term. The direct labor supply shock causes a serious decline in unemployment. With the improvement of epidemic prevention and control, the labor supply shock turns into a decline in enterprise productivity, and the employment situation improves. Thirdly, reducing the likehihod of disaster risk shocks, holding back the slowdown of post-disaster productivity, and shortening the length of time that disaster drags on economye can effectively reduce the adverse impact of the epidemic on the national economy. Fourthly, compared with fiscal subsidies and interest rate reduction, labor income tax reduction is the most effective policy tool to expand domestic demand in the post-epidemic period.

Key words: labor supply shock, disaster risk shock, macroeconomic effects, dynamic stochastic general equilibrium, policy effectiveness