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Why Don’t Blanchard-Kahn ever "Catch" Flu? And How it Matters for Measuring Indirect Cost of Epidemics in DSGE Framework

Author

Listed:
  • Andrzej Torój

    (Warsaw School of Economics, Institute of Econometrics)

Abstract
We attempt to apply a New Keynesian open economy model to simulate the economic consequences of influenza epidemic in Poland and measure the output loss (indirect cost) related to this disease. We introduce a negative health shock on the supply side of the economy and demonstrate that such a shock – implemented as a reduction in labour utilisation under unchanged labour cost – is not equivalent to negative labour supply shock. As expectational effects may hypothetically play a significant role in determining the economic cost of influenza, we attempt to endogenise the mechanism of epidemic in the model for the rational expectations solution algorithm to take account for the possibility of epidemic. This attempt has failed for the standard SIR model of epidemic and for the standard Blanchard-Kahn-like local solution methods, as the SIR block is only consistent with Blanchard-Kahn conditions under herd immunity of the population. In the deterministic simulation with the number of infected given exogenously, the output loss resulting from influenza-related presenteeism and absenteeism was estimated at 0.004% of the steady state level on average in the period 2000-2013. The simulated indirect cost in the New Keynesian model has turned out to be lower than the estimates that one could possibly obtain using the human capital approach. The reason for this discrepancy is the demand-oriented construction of the New Keynesian framework, and we treat this result as closer in notion to what the friction cost approach might suggest.

Suggested Citation

  • Andrzej Torój, 2013. "Why Don’t Blanchard-Kahn ever "Catch" Flu? And How it Matters for Measuring Indirect Cost of Epidemics in DSGE Framework," Central European Journal of Economic Modelling and Econometrics, Central European Journal of Economic Modelling and Econometrics, vol. 5(3), pages 185-206, September.
    • Handle: RePEc:psc:journl:v:5:y:2013:i:3:p:185-206
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    References listed on IDEAS

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    1. Oscar Bajo-Rubio & Antonio G. Gómez-Plana, 2020. "Provision of Public Health Services and Sustainable Development: Evidence for 12 Emerging Countries," Sustainability, MDPI, vol. 12(16), pages 1-25, August.

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    More about this item

    Keywords

    indirect cost; influenza; DSGE; Blanchard-Kahn conditions; modelling epidemics;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • I10 - Health, Education, and Welfare - - Health - - - General
    • I19 - Health, Education, and Welfare - - Health - - - Other

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