COVID-19 Puzzles: A Resolution

Abstract

This paper examines the economic impact of COVID-19 in an equilibrium framework. Our model, BDRA-SSL, combines two ingredients: (i) beliefs-dependent preferences for economic dynamics and (ii) stochastic SEIRD model with unpredictable birth and vaccine discovery events, and mitigating policy and behavioral responses, for disease propagation. We estimate the model based on economic time series and COVID-19 data. We show it explains the behaviors and levels of the S&P 500, the index volatility, and the number of new cases during the recent outbreak, while providing a good match for 25 unconditional moments of economic time series. Beliefs-dependence emerges as a critical ingredient for this comprehensive explanation of short term dynamics during the COVID-19 outbreak and of long run statistical properties. A comparison study establishes the performance of BDRA-SSL versus alternative specifications.

Keywords: COVID-19, SEIRD, shelter-in-place, jumps, beliefs-dependent preferences, stock market, equity premium, volatility, correlation, consumption, unemployment

JEL Classification: G13