The Macroeconomics of Epidemics
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.