Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/246827
Authors: 
Flaschel, Peter
Galanis, Giorgos
Tavani, Daniele
Veneziani, Roberto
Year of Publication: 
2021
Series/Report no.: 
FMM Working paper No. 62
Publisher: 
Hans-Böckler-Stiftung, Macroeconomic Policy Institute (IMK), Forum for Macroeconomics and Macroeconomic Policies (FFM), Düsseldorf
Abstract: 
This paper studies the interaction between epidemiological dynamics and the dynamics of economic activity in a demand-driven model in the structuralist/post-Keynesian tradition. On the one hand, rising aggregate demand increases the contact rate and therefore the probability of exposure to a virus. On the other hand, rising infection lowers aggregate demand because of reduced household spending. The resulting framework is well-suited for policy analysis through numerical exercises. We show that, first, laissez-faire gives rise to sharp fluctuations in demand and infections before herd immunity is achieved. Second, absent any restrictions on economic activity, physical distancing measures have rather limited mitigating effects. Third, lockdowns are effective, especially at reducing death rates while buying time before a vaccine is available, at the cost of a slightly more pronounced downturn in economic activity compared with alternative policies. This casts some doubt on the so-called "lives versus livelihood" policy trade-off. However, we also highlight the importance of policies aimed at mitigating the effects of the epidemic on workers' income.
Subjects: 
pandemic
aggregate demand
distribution
public policy
JEL: 
I1
E6
E25
E12
H0
Creative Commons License: 
cc-by Logo
Document Type: 
Working Paper

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