A Macroeconomic Model of Healthcare Saturation, Inequality and the Output–Pandemia Trade-off

Enrique G. Mendoza (), Eugenio Rojas, Linda L. Tesar () and Jing Zhang
Additional contact information
Enrique G. Mendoza: University of Pennsylvania and NBER
Linda L. Tesar: University of Michigan and NBER

IMF Economic Review, 2023, vol. 71, issue 1, No 7, 243-299

Abstract: Abstract COVID-19 became a global health emergency because it threatened the collapse of health systems as demand for health goods and services and their relative prices surged. Governments responded with lockdowns and transfers. Empirical evidence shows that lockdowns and healthcare saturation contribute to explain the cross-country variation in GDP drops even after controlling for COVID-19 cases and mortality. We explain this output–pandemia trade-off as resulting from a shock to subsistence health demand that increases with capital utilization and economic activity in a model with entrepreneurs and workers. The health system saturates as the gap between supply and subsistence narrows, which worsens consumption and income inequality. An externality distorts utilization, because firms do not internalize that lower utilization reduces healthcare saturation. Lockdowns and transfers to workers are the optimal policy response. Quantitatively, strict lockdowns and large transfers yield sizable welfare gains because they neutralize the utilization externality and prevent a sharp rise in inequality. Welfare and output costs vary in response to small parameter changes or deviations from optimal policies. Weak lockdowns coupled with weak transfers programs are the worst alternative and yet are in line with what several emerging and least developed countries implemented.

JEL-codes: E60 H0 I18 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1057/s41308-022-00192-6 Abstract (text/html)
Access to full text is restricted to subscribers.

Related works:
Working Paper: A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff (2021)
Working Paper: A Macroeconomic Model of Healthcare Saturation, Inequality and the Output-Pandemia Tradeoff (2020)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pal:imfecr:v:71:y:2023:i:1:d:10.1057_s41308-022-00192-6

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/41308/PS2

DOI: 10.1057/s41308-022-00192-6

Access Statistics for this article

More articles in IMF Economic Review from Palgrave Macmillan, International Monetary Fund
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().