Macroeconomic Dynamics and Reallocation in an Epidemic

Dirk Kruger (), Harald Uhlig () and Taojun Xie ()
Additional contact information
Dirk Kruger: University of Pennsylvania, CEPR and NBER
Taojun Xie: National University of Singapore

No 2020-43, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: In this paper we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. Extending the theoretical framework proposed by Eichenbaum-Rebelo-Trabandt (2020), we distinguish goods by their degree to which they can be consumed at home rather than in a social (and thus possibly contagious) context. We demonstrate that, within the model the “Swedish solution†of letting the epidemic play out without government intervention and allowing agents to shift their sectoral behavior on their own can lead to a substantial mitigation of the economic and human costs of the COVID-19 crisis, avoiding more than 80 of the decline in output and of number of deaths within one year, compared to a model in which sectors are assumed to be homogeneous. For different parameter configurations that capture the additional social distancing and hygiene activities individuals might engage in voluntarily, we show that infections may decline entirely on their own, simply due to the individually rational re-allocation of economic activity: the curve not only just flattens, it gets reversed.

Keywords: Epidemic; Coronavirus; Macroeconomics; Sectoral Substitution (search for similar items in EconPapers)
JEL-codes: E30 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2020
New Economics Papers: this item is included in nep-mac and nep-sea
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Citations: View citations in EconPapers (202)

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Working Paper: Macroeconomic Dynamics and Reallocation in an Epidemic (2020)
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