Optimal Switching between Locking Down and Opening the Economy Because of an Infection
15 Pages Posted: 11 Nov 2020 Last revised: 17 Dec 2020
Date Written: November 10, 2020
Abstract
We consider a two-regime switching model with the goal of minimizing the expected discounted cumulative combination of number of infections together with an inverse economical indicator. We assume the two regimes choices are between opening and and locking down the economy, and the choice affects the infection rate. We also assume that the economy level also has a small influence on both the infection rate and on the cumulative function being minimized. We then asymptotically find the value function and the boundaries of the stopping regions, and perform a numerical calibration to draw conclusions about optimal lockdown in a pandemic.
Keywords: Optimal Switching, Switching Model, Asymptotic Analysis, Viscosity Solutions, COVID-19.
JEL Classification: C61
Suggested Citation: Suggested Citation