Working Paper: CEPR ID: DP14606
Authors: Andrew Glover; Jonathan Heathcote; Dirk Krueger; Josevctor Rosrull
Abstract: To slow the spread of the COVID-19 virus, many countries shutdown parts of the economy. Older individuals have the most to gain from slowing virus diffusion. Younger workers in sectors that are shuttered have most to lose. We build a model in which economic activity and disease progression are jointly determined. Individuals differ by age (young, retired), by sector (basic, luxury), and by health status. Disease transmission occurs in the workplace, through consumption, at home, and in hospitals. We study the optimal economic mitigation policy for a government that can redistribute through taxes and transfers, but where taxation distorts labor supply. We show that shutdowns are optimally milder in 2020 when taxes are distortionary, and when the government does not have access to debt. A harder but shorter shutdown is preferred when vaccines become available in the first half of 2021.
Keywords: COVID-19; shutdowns; redistribution; economic policy
JEL Codes: E1; I14; H12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mitigation policies (F68) | health outcomes (I14) |
| Optimal level of lockdowns (H21) | economic activity (E20) |
| Optimal level of lockdowns (H21) | health outcomes (I14) |
| Government's choices regarding mitigation policies (H12) | economic welfare (D69) |
| Government's choices regarding mitigation policies (H12) | health outcomes (I14) |
| Expectations regarding vaccine availability (I19) | optimal mitigation path (H21) |
| Distortionary taxes (H31) | extent of economic shutdowns (F69) |
| Vaccine availability on the horizon (I19) | optimal level of lockdowns (H21) |