DP14520 The Macroeconomics of Epidemics

Author(s): Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt
Publication Date: March 2020
Date Revised: April 2021
Keyword(s): containment policies, COVID-19, Epidemic, Recessions
JEL(s): E1, H0, I1
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14520

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.