Working Paper: CEPR ID: DP14731
Authors: Fabrice Collard; Christian Hellwig; Tiziana Assenza; Sumudu Kankanamge; Martial Dupaigne; Nicolas Werquin; Patrick Feve
Abstract: We develop a comprehensive framework for analyzing optimal economic policy during a pandemic crisis in a dynamic economic model that trades off pandemic-induced mortality costs against the adverse economic impact of policy interventions. We use the comparison between the planner problem and the dynamic decentralized equilibrium to highlight the margins of policy intervention and describe optimal policy actions. As our main conclusion, we provide a strong and novel economic justification for the current approach to dealing with the pandemic, which is different from the existing health policy rationales. This justification is based on a simple economic concept, the shadow price of infection risks, which succinctly captures the static and dynamic trade-offs and externalities between economic prosperity and mortality risk as the pandemic unfolds.
Keywords: pandemic crisis; optimal policy
JEL Codes: E1; I1; H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| planner's decisions (R58) | dynamics of infection rates (C69) |
| planner's decisions (R58) | economic outcomes (F61) |
| dynamics of infection rates (C69) | economic outcomes (F61) |
| initial confinement phase (Y20) | new infections control (I12) |
| gradual deconfinement phase (P21) | herd immunity progression (C92) |
| planner's solution (P11) | recovery speed (C22) |
| planner's solution (P11) | long-term mortality (J17) |
| equilibrium solution (D50) | recovery speed (C22) |
| equilibrium solution (D50) | long-term mortality (J17) |
| shadow price of infection risks (J17) | optimal policy actions (E63) |
| planner's internalization (P21) | policy outcomes (D78) |
| agents' failure to internalize (D82) | slower recovery (E65) |
| agents' failure to internalize (D82) | higher mortality (I12) |