The Macroeconomics of Epidemics
Martin S. Eichenbaum, Sergio Rebelo, Mathias Trabandt
Summary
The authors extend the canonical SIR epidemiological model by embedding it in a macroeconomic framework where people's consumption and labor decisions affect the spread of infection. They show that the epidemic causes a sharp recession because infected and susceptible agents cut activity to reduce contagion. A key tension emerges: the competitive equilibrium worsens the epidemic because individuals do not internalize the infection externality, and well-designed containment policy can mitigate the death toll though it deepens the short-run economic contraction.
Key findings
- Combining SIR epidemic dynamics with a macro model produces a large, endogenous recession driven by reduced consumption and work to avoid infection.
- Because individuals ignore the externality their activity imposes on others' infection risk, the laissez-faire outcome is inefficient.
- Optimal containment policy (e.g., taxes/lockdowns) trades off a deeper economic downturn against fewer infections and deaths.
Subjects & keywords
Cite this paper
Martin S. Eichenbaum, Sergio Rebelo, & Mathias Trabandt (2021). The Macroeconomics of Epidemics. The Review of Financial Studies. https://doi.org/10.1093/rfs/hhab040
@article{eichenbaum2021macroeconomics,
author = {Martin S. Eichenbaum and Sergio Rebelo and Mathias Trabandt},
title = {The Macroeconomics of Epidemics},
journal = {The Review of Financial Studies},
year = {2021},
doi = {10.1093/rfs/hhab040},
url = {https://doi.org/10.1093/rfs/hhab040}
}