DP14612 On the Optimal "Lockdown" During an Epidemic

Author(s): Martin Gonzalez-Eiras, Dirk Niepelt
Publication Date: April 2020
Keyword(s): COVID-19, Epidemic, Health care system, lockdown, logistic model, Pandemic, Production shortfall, SIR model, social distancing
JEL(s): I18
Programme Areas: Public Economics, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14612

We embed a lockdown choice in a simplified epidemiological model and derive formulas for the optimal lockdown intensity and duration. The optimal policy reflects the rate of time preference, epidemiological factors, the hazard rate of vaccine discovery, learning effects in the health care sector, and the severity of output losses due to a lockdown. In our baseline specification a Covid-19 shock as currently experienced by the US optimally triggers a reduction in economic activity by two thirds, for about 50 days, or approximately 9.5 percent of annual GDP.