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Title: Epidemics in the Neoclassical and New-Keynesian Models

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

Publication Date: June 2020

Keyword(s): comovement, Epidemic, investment and Recession

Programme Area(s): Macroeconomics and Growth

Abstract: We analyse the e§ects of an epidemic in three standard macroeconomic models. We �nd that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Intro- ducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely áexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.

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Bibliographic Reference

Eichenbaum, M, Rebelo, S and Trabandt, M. 2020. 'Epidemics in the Neoclassical and New-Keynesian Models'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14903