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Macroeconomic Dynamics and Reallocation in an Epidemic

Author

Listed:
  • Dirk Krueger

    (University of Pennsylvania and CEPR)

  • Harald Uhlig

    (University of Chicago, NBER, CEPR)

  • Taojun Xie

    (National University of Singapore)

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 di?erent parameter con?gurations 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 ?attens, it gets reversed.

Suggested Citation

  • Dirk Krueger & Harald Uhlig & Taojun Xie, 2020. "Macroeconomic Dynamics and Reallocation in an Epidemic," PIER Working Paper Archive 20-015, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:20-015
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Epidemic; Coronavirus; Macroeconomics; Sectoral Substitution;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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