Epidemics in the New Keynesian model

Martin S. Eichenbaum, Sergio Rebelo and Mathias Trabandt

Journal of Economic Dynamics and Control, 2022, vol. 140, issue C

Abstract: This paper documents the behavior of key macro aggregates in the wake of the Covid epidemic. We show that a unique feature of the Covid recession is that the peak-to-trough decline is roughly the same for consumption, investment, and output. In contrast to the 2008 recession, there was only a short-lived rise in financial stress that quickly subsided. Finally, there was mild deflation between the peak and the trough of the Covid recession. We argue that a New Keynesian model that explicitly incorporates epidemic dynamics captures these qualitative features of the Covid recession. A key feature of the model is that Covid acts like a negative shock to the demand for consumption and the supply of labor.

Keywords: Epidemic; Comovement; Investment; Recession (search for similar items in EconPapers)
JEL-codes: E1 H0 I1 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Working Paper: Epidemics in the New Keynesian Model (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:140:y:2022:i:c:s0165188922000392

DOI: 10.1016/j.jedc.2022.104334

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