The Macroeconomics of Epidemics

Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt

NBER Working Paper No. 26882
Issued in March 2020, Revised in April 2021
NBER Program(s):Economic Fluctuations and Growth, Health Economics, Public Economics

We extend the canonical epidemiology model to study the interaction between economic decisions and epidemics. Our model implies that people cut back on consumption and work to reduce the chances of being infected. These decisions reduce the severity of the epidemic but exacerbate the size of the associated recession. The competitive equilibrium is not socially optimal because infected people do not fully internalize the effect of their economic decisions on the spread of the virus. In our benchmark model, the best simple containment policy increases the severity of the recession but saves roughly half a million lives in the United States.

Supplementary materials for this paper:

• Matlab replication codes can be downloaded directly from the URL

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w26882