Working Paper: CEPR ID: DP15373
Authors: Martin Eichenbaum; Miguel Godinho De Matos; Francisco Lima; Sergio Rebelo; Mathias Trabandt
Abstract: The Covid epidemic had a large impact on economic activity. In contrast, the dramatic decline in mortality from infectious diseases over the past 120 years had a small economic impact. We argue that people's response to successive Covid waves helps reconcile these two findings. Our analysis uses a unique administrative data set with anonymized monthly expenditures at the individual level that covers the first three Covid waves. Consumer expenditures fell by about the same amount in the first and third waves, even though the risk of getting infected was larger in the third wave. We find that people had pessimistic prior beliefs about the case-fatality rates that converged over time to the true case-fatality rates. Using a model where Covid is endemic, we show that the impact of Covid is small when people know the true case-fatality rate but large when people have empirically-plausible pessimistic prior beliefs about the case-fatality rate. These results reconcile the large economic impact of Covid with the small effect of the secular decline in mortality from infectious diseases estimated in the literature.
Keywords: Risk; COVID-19; Epidemics; Consumption; Health; Expectations; Endemic
JEL Codes: E21; I10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| COVID-19 (I15) | consumer expenditures (D12) |
| pessimistic prior beliefs about case-fatality rates (D80) | consumer expenditures (D12) |
| beliefs about case-fatality rates converge to true rates (D80) | economic impact of COVID-19 (F69) |
| age (J14) | consumer expenditures (D12) |
| observed data (Y10) | beliefs about case-fatality rates (I12) |