Epidemics in the Neoclassical and New Keynesian Models

Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt

NBER Working Paper No. 27430
Issued in June 2020
NBER Program(s):Economic Fluctuations and Growth

We analyze the effects of an epidemic in three standard macroeconomic models. We find that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Introducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely flexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w27430