Economic Policy Incentives to Preserve Lives and Livelihoods / Roberto Chang, Andrés Velasco.

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Chang, Roberto

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w27020.Publication details: Cambridge, Mass. National Bureau of Economic Research 2020.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: The Covid-19 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. The analysis also yields a critique of the current use of SIR models for policy evaluation, in the spirit of Lucas (1983).

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w27020 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w27018 Lock-downs, Loneliness and Life Satisfaction /	nber w27019 Covid-19: Testing Inequality in New York City /	nber w2702 Collapsing Exchange Rate Regimes: Shocks and Biases /	nber w27020 Economic Policy Incentives to Preserve Lives and Livelihoods /	nber w27021 The Subways Seeded the Massive Coronavirus Epidemic in New York City /	nber w27022 Is Financial Globalization in Reverse After the 2008 Global Financial Crisis? Evidence from Corporate Valuations /	nber w27023 Estimating the COVID-19 Infection Rate: Anatomy of an Inference Problem /	Next

April 2020.

The Covid-19 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. The analysis also yields a critique of the current use of SIR models for policy evaluation, in the spirit of Lucas (1983).