Pandemics and Economic Activity: a Framework for Policy Analysis

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Flaschel, Peter; Galanis, Giorgos; Tavani, Daniele and Veneziani, Roberto. 2022. Pandemics and Economic Activity: a Framework for Policy Analysis. Review of Behavioral Economics, 9(1), pp. 1-44. ISSN 2326-6198 [Article]

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Abstract or Description

This paper studies the interaction between epidemiological dynamics and the dynamics of economic activity in a simple model in the structuralist/post-Keynesian tradition. On the one hand, rising economic activity increases the contact rate and therefore the probability of exposure to a virus. On the other hand, rising infection lowers economic activity through both supply and demand channels. The resulting framework is well-suited for policy analysis through numerical exercises. We show that, first, laissez-faire gives rise to sharp fluctuations in activity and infections before herd immunity is achieved. Second, absent any restrictions on economic activity, physical distancing measures have rather limited mitigating effects. Third, lockdowns are effective, especially at reducing death rates while buying time before a vaccine is widely rolled out, at the cost of a slightly more pronounced downturn in economic activity compared with alternative policies. This casts some doubt on the so-called “lives versus livelihood” policy trade-off. However, we also highlight the importance of policies aimed at mitigating the effects of the epidemic on workers’ income.

Item Type:

Article

Identification Number (DOI):

https://doi.org/10.1561/105.00000150

Additional Information:

JEL Classification Codes: I18 (Public Health); E6 (Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook); E25 (Aggregate Factor Income Distribution); E12 (Keynes, Keynesian, Post-Keynesian, Modern Monetary Theory); H0 (Public economics, General)

Keywords:

COVID-19, pandemic, economic activity, distribution, public policy

Departments, Centres and Research Units:

Institute of Management Studies

Dates: