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Essential and non-essential goods: a dynamic stochastic general equilibrium modeling of the infectious disease coronavirus (COVID-19) outbreak

Author

Listed:
  • Nuno Baetas da Silva

    (Ph.D. Student at Faculty of Economics, University of Coimbra)

  • António Portugal Duarte

    (University of Coimbra, Centre for Business and Economics CeBER and Faculty of Economics)

Abstract
Making use of a two-country, two-sector, New Keynesian model with essential and nonessential goods we assess the macroeconomic consequences of a labor supply shock in the Euro Area. Our model incorporates health status in the households' maximization problem which depends on the time devoted to leisure. Health status is linked to the consumption of non-essential goods, such that the demand for non-essentials is decreasing with contemporaneous health. After calibrating the model for the case of Portugal and the rest of the Euro Area, our simulations show that, a labor supply shock affecting only the latter, reduces the demand for non-essential goods, generates infation in the Portuguese economy and pushes both regions into economic recession, depriving households from essential goods. If the labor supply shock affects both economies, the negative income effect dominates the decreased demand effect for non-essential goods and that stagnation is a plausible scenario. In addition, our calibration scheme allows us to conclude that the asymmetric effects across economies may be due to different price rigidities between sectors and to different production structures between countries.

Suggested Citation

  • Nuno Baetas da Silva & António Portugal Duarte, 2021. "Essential and non-essential goods: a dynamic stochastic general equilibrium modeling of the infectious disease coronavirus (COVID-19) outbreak," CeBER Working Papers 2021-04, Centre for Business and Economics Research (CeBER), University of Coimbra.
    • Handle: RePEc:gmf:papers:2021-04
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    Cited by:

    1. António Manuel Portugal & Fatima Sol, 2022. "Macroeconomic Impacts of the Covid-19 Pandemic in Some European Union Countries: A Counterfactual Analysis," CeBER Working Papers 2022-05, Centre for Business and Economics Research (CeBER), University of Coimbra.

    More about this item

    Keywords

    Essential goods; Non-essential goods; COVID-19; DSGE; Euro Area.;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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