Health Shocks in a General Equilibrium Model

35 Pages Posted: 27 May 2020 Last revised: 20 Jul 2020

See all articles by Salem M. Abo-Zaid

Salem M. Abo-Zaid

University of Maryland, Baltimore County

Xuguang Simon Sheng

American University - Department of Economics

Date Written: May 27, 2020

Abstract

This paper presents a dynamic general equilibrium model with a health shock in a multi-sector model. The health shock leads to a reduction in (i) labor supply in sectors that are sensitive to pandemics such as COVID-19, (ii) the demand for products of firms in these sectors, (iii) the willingness of consumers to spend on the products of both sectors, and (iv) the utilization of labor in the pandemic-sensitive sectors. While health shocks have significant supply-side effects on economic activity, the demand-side effects are considerably bigger, particularly for shorter horizons and more rigid prices. Depending on the strength of each effect, the aggregate inflation rate might increase or decrease following the shock. Another important channel through which the health shock impacts economic activity is the reallocation of resources from more susceptible sectors to less susceptible ones.

Keywords: COVID-19, DSGE, Health Shocks, Labor Hoarding, Reallocation

JEL Classification: E31, E32, I10

Suggested Citation

Abo-Zaid, Salem M. and Sheng, Xuguang Simon, Health Shocks in a General Equilibrium Model (May 27, 2020). Available at SSRN: https://ssrn.com/abstract=3611404 or http://dx.doi.org/10.2139/ssrn.3611404

Salem M. Abo-Zaid (Contact Author)

University of Maryland, Baltimore County ( email )

1000 Hilltop Circle
Baltimore, MD 21250
United States
410-455-2498 (Phone)

HOME PAGE: http://sites.google.com/site/salemabozaidshomepage/home

Xuguang Simon Sheng

American University - Department of Economics ( email )

4400 Massachusetts Avenue, N.W.
Washington, DC 20016-8029
United States

HOME PAGE: http://https://www.american.edu/cas/faculty/sheng.cfm

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