DP14903 Epidemics in the Neoclassical and New-Keynesian Models
| Author(s): | Martin Eichenbaum, Sérgio Rebelo, Mathias Trabandt |
| Publication Date: | June 2020 |
| Date Revised: | June 2020 |
| Keyword(s): | comovement, Epidemic, investment, Recession |
| JEL(s): | E1, H0, I1 |
| Programme Areas: | Macroeconomics and Growth |
| Link to this Page: | cepr.org/active/publications/discussion_papers/dp.php?dpno=14903 |
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.