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Pandemic Lockdown: The Role of Government Commitment

Author

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  • Christian Moser
  • Pierre Yared

Abstract

This paper studies lockdown policy in a dynamic economy without government commitment. Lockdown imposes a cap on labor supply, which improves health prospects at the cost of economic output and consumption. A government would like to commit to the extent of future lockdowns in order to guarantee an economic outlook that supports efficient levels of investment into intermediate inputs. However, such a commitment is not credible, since investments are sunk at the time when the government chooses a lockdown. As a result, lockdown under lack of commitment deviates from the optimal policy. Rules that limit a government’s lockdown discretion can improve social welfare, even in the presence of noncontractible information. Quantitatively, lack of commitment causes lockdown to be significantly more severe than is socially optimal. The output and consumption loss due to lack of commitment is greater for higher intermediate input shares, higher discount rates, higher values of life, higher disease transmission rates at and outside of work, and longer vaccine arrival times.

Suggested Citation

  • Christian Moser & Pierre Yared, 2021. "Pandemic Lockdown: The Role of Government Commitment," Staff Report 627, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:92934
    DOI: 10.21034/sr.627
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    More about this item

    Keywords

    Lockdown; Commitment; Flexibility; Non-pharmaceutical interventions; Pandemic restrictions; SIRD model; Rules; Optimal policy; COVID-19;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health

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