Expectations, Infections, and Economic Activity

Martin Eichenbaum, Miguel Godinho de Matos, Francisco Lima, Rebelo, Sérgio and Mathias Trabandt

No 15373, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The Covid epidemic had a large impact on economic activity. In contrast, the dramatic decline in mortality from infectious diseases over the past 120 years had a small economic impact. We argue that people's response to successive Covid waves helps reconcile these two findings. Our analysis uses a unique administrative data set with anonymized monthly expenditures at the individual level that covers the first three Covid waves. Consumer expenditures fell by about the same amount in the first and third waves, even though the risk of getting infected was larger in the third wave. We find that people had pessimistic prior beliefs about the case-fatality rates that converged over time to the true case-fatality rates. Using a model where Covid is endemic, we show that the impact of Covid is small when people know the true case-fatality rate but large when people have empirically-plausible pessimistic prior beliefs about the case-fatality rate. These results reconcile the large economic impact of Covid with the small effect of the secular decline in mortality from infectious diseases estimated in the literature.

Keywords: Risk; Covid-19 (search for similar items in EconPapers)
JEL-codes: E21 I10 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-mac, nep-ore and nep-rmg
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Citations: View citations in EconPapers (12)

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Related works:
Journal Article: Expectations, Infections, and Economic Activity (2024)
Working Paper: Expectations, Infections, and Economic Activity (2020)
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