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COVID-19 Misperception and Macroeconomy

Masashige Hamano, Munechika Katayama and So Kubota ()

No 2016, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: Uncertainty about the true state of the COVID-19 pandemic has caused substantial difficulty in economic activities and policymaking. How does the uncertainty affect the macroeconomy and infections? What are the policy implications? To answer these questions, this paper presents a model that incorporates people's misperception about the current COVID-19 spread in the market. Our baseline model shows that underestimation about the number of infections reduces the social welfare due to worsening the externality of economic activities on virus transmissions while overestimation improves it to some extent. In an extended model with limited medical resources, we show that a slight breakdown of the medical system can mitigate the underestimation of the risk of being infected. We also consider the quarantine policy that limits both infections and the fall in economic activities for various degrees of misperception. Finally, affecting the extent of misperception about the spread is shown to be an effective policy tool that substitutes proposed containment policies in the literature.

Keywords: COVID-19; imperfect information; SIR-macro (search for similar items in EconPapers)
JEL-codes: E1 H0 I1 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2020-11
New Economics Papers: this item is included in nep-dge and nep-mac
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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