Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/331039 
Year of Publication: 
2023
Citation: 
[Journal:] Research in Globalization [ISSN:] 2590-051X [Volume:] 6 [Article No.:] 100106 [Year:] 2023 [Pages:] 1-19
Publisher: 
Elsevier, Amsterdam
Abstract: 
In this paper a two-phase pandemic-economic model is proposed, with phase-specific modeling and policy variables - as suggested by the chronicle of pandemic and economic policy developments over the period 2020-2021. In a first phase, the spread of a pandemic disease is the primary concern of authorities, that still also pay attention to economic activity. A dynamic model is introduced, embedding a two-way interaction between an extended epidemic Susceptible-Infected-Recovered (SIR) model and output gap dynamics. In the second phase, posterior to lockdowns when waves fade away, monetary policy becomes the control variable, pursuing again a joint objective, of supporting a non-inflationary recovery without causing significant fatalities. We then use a standard stylized model for the macroeconomy with simplified infection dynamics, that also enter the policy objective. The two phases are thus studied in a regime change model where the control and state variables as well as the objective function are allowed to change across phases. We solve the model over a finite horizon and derive the optimal lockdown or monetary policy path that jointly minimizes pandemic and economic losses. The two-phase finite horizon decision model is empirically calibrated and numerically solved by discretization and optimization methods. In the first phase, albeit with lasting adverse effects on output, lockdown-based control can be effective in reducing infection rates, but less so when starting from a negative output gap. In the second phase, accommodative monetary policy appears to be effective on both fronts, with even an eventual need for a return to tightening as output gap closes and inflation resumes.
Subjects: 
Covid19
Macromodelling
Monetary policy
Nonlinearity
Optimal control
Regime change
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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