DP14688 The Macroeconomics of Testing and Quarantining

Author(s): Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt
Publication Date: May 2020
Date Revised: May 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

Epidemiology models used in macroeconomics generally assume that people know their current health status. In this paper, we consider a more realistic environment in which people are uncertain about their health status. We use our model to study the impact of testing with and without quarantining infected people. We find that testing without quarantines can worsen the economic and health repercussions of an epidemic. In contrast, a policy that uses tests to quarantine infected people has very large social benefits. Critically, this policy ameliorates the sharp trade-offs between declines in economic activity and health outcomes that is associated with broad-based containment policies like lockdowns. This amelioration is particularly dramatic when people who recover from an infection acquire only temporary immunity to the virus.