DP14688 The Macroeconomics of Testing and Quarantining

Author(s): Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt
Publication Date: May 2020
Date Revised: August 2020
Keyword(s): containment, COVID-19, Epidemic, Quarantine, Recessions, Testing
JEL(s): E1, H0, I1
Programme Areas: Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14688

Much of the economics literature on epidemics assumes that people know their current health state. Under this assumption, there is no role for testing. To study the general equilibrium effects of testing on economic outcomes, we develop a model of epidemics in which people who are not tested are uncertain about their health state. We find that, when combined with quarantines, testing dramatically reduces the economic costs of the epidemic. This reduction is particularly dramatic when people who recover from an infection acquire only temporary immunity to the virus.