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HomeThe trade-off between public health and the economy in the early stage of the COVID-19 pandemic
The trade-off between public health and the economy in the early stage of the COVID-19 pandemic
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How does contagion risk affect the business cycle? We find that the presence of contagion risk significantly alters the transmission of standard macroeconomic shocks. Relative to the first-best equilibrium, the contagion externality significantly reduces the response of output to a technology shock. We also argue that the magnitude of the trade-off between health and the economy crucially depends on how the probability of infection is specified. If the probability of infection only depends on agents’ endogenous choices, a weaker trade-off emerges. In such a framework, and relative to the laissez faire equilibrium, suboptimal policies such as zero COVID strategies, health insurance, or mandatory testing substantially attenuate recessions that are caused by epidemics. Therefore, policies primarily aimed at preserving public health do not necessarily come at the cost of deeper recessions.
- Published:
- Corporate author(s): European Central Bank
- Personal author(s): Jaccard, Ivan
- Themes: Public health , Economy — Finance
- Subject: coronavirus disease , information technology , macroeconomics , public health , risk management
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| ISSN 1725-2806 | ISBN 978-92-899-5274-3 | DOI 10.2866/837072 | Catalogue number QB-AR-22-055-EN-N |
- Released on EU Publications:
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