The Macroeconomics of Epidemics

Abstract We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size o...

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Bibliographic Details
Published inThe Review of financial studies Vol. 34; no. 11; pp. 5149 - 5187
Main Authors Eichenbaum, Martin S, Rebelo, Sergio, Trabandt, Mathias
Format Journal Article
LanguageEnglish
Published Oxford University Press 01.11.2021
Subjects
I1
H0
E1
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Summary:Abstract We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size of the associated recession. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the United States.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhab040