Discussion Paper Details

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Title: The Macroeconomics of Epidemics

Author(s): Martin Eichenbaum, Sérgio Rebelo and Mathias Trabandt

Publication Date: March 2020

Keyword(s): containment policies, COVID-19, Epidemic and Recessions

Programme Area(s): International Macroeconomics and Finance

Abstract: We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people's decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. 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 U.S.

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Bibliographic Reference

Eichenbaum, M, Rebelo, S and Trabandt, M. 2020. 'The Macroeconomics of Epidemics'. London, Centre for Economic Policy Research.