Infection Is the Cycle: Unemployment, Output and Economic Policies in the COVID-19 Pandemic

Maria Cristina Barbieri Góes and Ettore Gallo

Review of Political Economy, 2021, vol. 33, issue 3, 377-393

Abstract: This paper seeks to capture the dynamic interaction between the epidemiological evolution of COVID-19 and its effect on the macroeconomy, in absence of widespread vaccination. We do that by building a stylized two-equations dynamical system in the COVID-19 positivity rate and the unemployment rate. The solution of the system makes the case for an endemic equilibrium of COVID-19 infections, thus producing waves in the two variables in the absence of widespread immunity through vaccination. Furthermore, we model the impact of the pandemic-driven unemployment shock on output, showing how the emergence of cyclical downswings could determine a L-shaped recession in the medium run, in absence of adequate stimulus policies. Moreover, we simulate the model, calibrating it for the US. The simulation highlights the effects on unemployment and on overall economic activity produced by recurrent waves of COVID-19, which risk to jeopardize the coming back to the pre-crisis trend in the medium run.

Date: 2021
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DOI: 10.1080/09538259.2020.1861817

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