Review of Behavioral Economics > Vol 9 > Issue 1

Pandemics and Economic Activity: A Framework for Policy Analysis

Peter Flaschel, Department of Economics, Bielefeld University, Germany, pflaschel@uni-bielefeld.de , Giorgos Galanis, Centre for Applied Macroeconomic Analysis, Australian National University, Australia, Goldsmiths, University of London and CRETA, University of Warwick, UK, g.galanis@gold.ac.uk , Daniele Tavani, Department of Economics, Colorado State University, United States, daniele.tavani@colostate.edu , Roberto Veneziani, School of Economics and Finance, Queen Mary University of London, UK, r.veneziani@qmul.ac.uk
 
Suggested Citation
Peter Flaschel, Giorgos Galanis, Daniele Tavani and Roberto Veneziani (2022), "Pandemics and Economic Activity: A Framework for Policy Analysis", Review of Behavioral Economics: Vol. 9: No. 1, pp 1-44. http://dx.doi.org/10.1561/105.00000150

Publication Date: 04 Apr 2022
© 2022 P. Flaschel, G. Galanis, D. Tavani and R. Veneziani
 
Subjects
Behavioral Economics
 
Keywords
JEL Codes: I18, E6, E25, E12, H0
COVID-19pandemiceconomic activitydistributionpublic policy
 

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In this article:
1. Introduction 
2. The SEIR-u Model: Epidemic Dynamics and Economic Activity 
3. SEIR-u Model: Simulations and Policy Exercises 
4. Distributional Dynamics 
5. Robustness Checks and Extensions 
6. Conclusion 
Appendix 
References 

Abstract

This paper studies the interaction between epidemiological dynamics and the dynamics of economic activity in a simple model in the structuralist/post-Keynesian tradition. On the one hand, rising economic activity increases the contact rate and therefore the probability of exposure to a virus. On the other hand, rising infection lowers economic activity through both supply and demand channels. The resulting framework is well-suited for policy analysis through numerical exercises. We show that, first, laissez-faire gives rise to sharp fluctuations in activity and infections before herd immunity is achieved. Second, absent any restrictions on economic activity, physical distancing measures have rather limited mitigating effects. Third, lockdowns are effective, especially at reducing death rates while buying time before a vaccine is widely rolled out, at the cost of a slightly more pronounced downturn in economic activity compared with alternative policies. This casts some doubt on the so-called “lives versus livelihood” policy trade-off. However, we also highlight the importance of policies aimed at mitigating the effects of the epidemic on workers’ income.

DOI:10.1561/105.00000150