Optimally Controlling an Epidemic

Martin Gonzalez-Eiras and Dirk Niepelt

No 20.06, Working Papers from Swiss National Bank, Study Center Gerzensee

Abstract: We propose a flexible model of infectious dynamics with a single endogenous state variable and economic choices. We characterize equilibrium, optimal outcomes, static and dynamic externalities, and prove the following: (i) A lockdown generically is followed by policies to stimulate activity. (ii) Re-infection risk lowers the activity level chosen by the government early on and, for small static externalities, implies too cautious equilibrium steady-state activity. (iii) When a cure arrives deterministically, optimal policy is dis-continous, featuring a light/strict lockdown when the arrival date exceeds/falls short of a specific value. Calibrated to the ongoing COVID-19 pandemic the baseline model and a battery of robustness checks and extensions imply (iv) lockdowns for 3-4 months, with activity reductions by 25-40 percent, and (v) substantial welfare gains from optimal policy unless the government lacks instruments to stimulate activity after a lockdown.

Pages: 54 pages
Date: 2020-12
New Economics Papers: this item is included in nep-dge and nep-mic
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Optimally Controlling an Epidemic (2020)
Working Paper: Optimally Controlling an Epidemic (2020)
Working Paper: Optimally Controlling an Epidemic (2020)
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