The trade-off between public health and the economy in the early stage of the COVID-19 pandemic

Ivan Jaccard

No 2690, Working Paper Series from European Central Bank

Abstract: How does contagion risk affect the business cycle? We find that the presence of contagion risk significantly alters the transmission of standard macroeconomic shocks. Relative to the first-best equilibrium, the contagion externality significantly reduces the response of output to a technology shock. We also argue that the magnitude of the trade-off between health and the economy crucially depends on how the probability of infection is specified. If the probability of infection only depends on agents’ endogenous choices, a weaker trade-off emerges. In such a framework, and relative to the laissez-faire equilibrium, suboptimal policies such as zero COVID strategies, health insurance, or mandatory testing substantially attenuate recessions that are caused by epidemics. Therefore, policies primarily aimed at preserving public health do not necessarily come at the cost of deeper recessions. JEL Classification: E1, H0, I1

Keywords: Contagion Externality; Incomplete Markets; Lockdown Policies; Risk Sharing (search for similar items in EconPapers)
Date: 2022-07
New Economics Papers: this item is included in nep-dge and nep-rmg
Note: 737337
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222690

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