ABSTRACT

Economic Policy Incentives to Preserve Lives and Livelihoods   [open pdf - 0B]

From the Abstract: "The Covid-19 [coronavirus disease 2019] pandemic has motivated a myriad of studies and proposals on how economic policy should respond to this colossal shock. But in this debate it is seldom recognized that the health shock is not entirely exogenous. Its magnitude and dynamics themselves depend on economic policies, and the explicit or implicit incentives those policies provide. To illuminate the feedback loops between medical and economic factors we develop a minimal economic model of pandemics. In the model, as in reality, individual decisions to comply (or not) with virus-related public health directives depend on economic variables and incentives, which themselves respond to current economic policy and expectations of future policies. The analysis yields several practical lessons: because policies affect the speed of virus transmission via incentives, public health measures and economic policies can complement each other, reducing the cost of attaining desired social goals; expectations of expansionary macroeconomic policies during the recovery phase can help reduce the speed of infection, and hence the size of the health shock; the credibility of announced policies is key to rule out both self-fulfilling pessimistic expectations and time inconsistency problems."

Report Number:
NBER Working Paper No. 27020; National Bureau of Economic Research Working Paper No. 27020
Author:
Publisher:
Date:
2020-04
Series:
Copyright:
2020 Roberto Chang and Andrés Velasco
Retrieved From:
National Bureau of Economic Research: https://www.nber.org/
Media Type:
application/pdf
URL:
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