The Macroeconomics of Epidemics Martin S. Eichenbaum Sergio Rebelo Mathias Trabandt NBER Working Paper No. 26882

Issued in March 2020, Revised in April 2020

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’s decision to cut back on consumption and work reduces the severity of the epidemic, as measured by total deaths. These decisions exacerbate the size of the recession caused by the epidemic. 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 U.S.

(462 K) Acknowledgments Machine-readable bibliographic record - MARC, RIS, BibTeX Document Object Identifier (DOI): 10.3386/w26882