Macroeconomic Dynamics and Reallocation in an Epidemic

35 Pages Posted: 28 Apr 2020

See all articles by Dirk Krueger

Dirk Krueger

University of Pennsylvania

Harald Uhlig

University of Chicago - Department of Economics

Taojun Xie

National University of Singapore (NUS) - Asia Competitiveness Institute

Multiple version iconThere are 3 versions of this paper

Date Written: April 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.

Suggested Citation

Krueger, Dirk and Uhlig, Harald and Xie, Taojun, Macroeconomic Dynamics and Reallocation in an Epidemic (April 2020). NBER Working Paper No. w27047, Available at SSRN: https://ssrn.com/abstract=3586179

Dirk Krueger (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Harald Uhlig

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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