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The trade-off between public health and the economy in the early stage of the COVID-19 pandemic

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  • Jaccard, Ivan

Abstract

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. JEL Classification: E1, H0, I1

Suggested Citation

  • Jaccard, Ivan, 2022. "The trade-off between public health and the economy in the early stage of the COVID-19 pandemic," Working Paper Series 2690, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20222690
    Note: 737337
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    References listed on IDEAS

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    More about this item

    Keywords

    Contagion Externality; Incomplete Markets; Lockdown Policies; Risk Sharing;
    All these keywords.

    JEL classification:

    • E1 - Macroeconomics and Monetary Economics - - General Aggregative Models
    • H0 - Public Economics - - General
    • I1 - Health, Education, and Welfare - - Health

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