The Trade-Off between Public Health and the Economy in the Early Stage of the COVID-19 Pandemic
51 Pages Posted: 16 Aug 2022
Date Written: July, 2022
Abstract
How does contagion risk affect the business cycle? We find that the presence of contagion risk significantly alters the transmission of standard macroeconomic shocks. Relative to the first-best equilibrium, the contagion externality significantly reduces the response of output to a technology shock. We also argue that the magnitude of the trade-off between health and the economy crucially depends on how the probability of infection is specified. If the probability of infection only depends on agents’ endogenous choices, a weaker trade-off emerges. In such a framework, and relative to the laissez-faire equilibrium, suboptimal policies such as zero COVID strategies, health insurance, or mandatory testing substantially attenuate recessions that are caused by epidemics. Therefore, policies primarily aimed at preserving public health do not necessarily come at the cost of deeper recessions.
Note:
Funding Information: This project has not benefitted been from any outside source of funding.
Conflict of Interests: I declare that there is no conflict of interest.
Keywords: Contagion Externality, Incomplete Markets, Lockdown Policies, Risk Sharing
JEL Classification: E1, H0, I1
Suggested Citation: Suggested Citation