Macroeconomic Dynamics and Reallocation in an Epidemic

35 Pages Posted: 16 Apr 2020 Last revised: 24 Apr 2020

See all articles by Dirk Kruger

Dirk Kruger

University of Pennsylvania - Department of Economics

Harald Uhlig

University of Chicago - Department of Economics

Taojun Xie

National University of Singapore (NUS) - Asia Competitiveness Institute

Date Written: April 23, 2020

Abstract

In this paper we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. Extending the theoretical framework proposed by Eichenbaum-Rebelo-Trabandt (2020), we distinguish goods by their degree to which they can be consumed at home rather than in a social (and thus possibly contagious) context. We demonstrate that, within the model the “Swedish solution” of letting the epidemic play out without government intervention and allowing agents to shift their sectoral behavior on their own can lead to a substantial mitigation of the economic and human costs of the COVID-19 crisis, avoiding more than 80 of the decline in output and of number of deaths within one year, compared to a model in which sectors are assumed to be homogeneous. For different parameter configurations that capture the additional social distancing and hygiene activities individuals might engage in voluntarily, we show that infections may decline entirely on their own, simply due to the individually rational re-allocation of economic activity: the curve not only just flattens, it gets reversed.

Keywords: Epidemic, Coronavirus, Macroeconomics, Sectoral Substitution

JEL Classification: E52, E30

Suggested Citation

Kruger, Dirk and Uhlig, Harald and Xie, Taojun, Macroeconomic Dynamics and Reallocation in an Epidemic (April 23, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-43, Available at SSRN: https://ssrn.com/abstract=3577745 or http://dx.doi.org/10.2139/ssrn.3577745

Dirk Kruger

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Taojun Xie

National University of Singapore (NUS) - Asia Competitiveness Institute ( email )

469C Bukit Timah Road
Level 3, Wing A
259772
Singapore

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