Working Paper: CEPR ID: DP14903
Authors: Martin Eichenbaum; Sergio Rebelo; Mathias Trabandt
Abstract: We analyse the e§ects of an epidemic in three standard macroeconomic models. We Önd that the neoclassical model does not rationalize the positive comovement of consumption and investment observed in recessions associated with an epidemic. Intro- ducing monopolistic competition into the neoclassical model remedies this shortcoming even when prices are completely áexible. Finally, sticky prices lead to a larger recession but do not fundamentally alter the predictions of the monopolistic competition model.
Keywords: epidemic; comovement; investment; recession
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 |
|---|---|
| COVID epidemic (F44) | demand for consumption goods (D12) |
| COVID epidemic (F44) | supply of labor (J20) |
| COVID epidemic (F44) | consumption (E21) |
| COVID epidemic (F44) | investment (G31) |
| supply of labor (J20) | consumption (E21) |
| supply of labor (J20) | investment (G31) |
| demand for consumption goods (D12) | consumption (E21) |
| demand for consumption goods (D12) | investment (G31) |
| sticky prices (D41) | depth of recession (E32) |