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.