Macroeconomic Dynamics and Reallocation in an Epidemic: Evaluating the “Swedish Solution”

By Dirk Krueger, Harald Uhlig, Taojun Xie. Social Science Research Network, 2020

208 citations recorded by the source corpus.

In this paper we argue that endogenous shifts in private consumption behavior across sectors of the economy can act as a potent mitigation mechanism during an epidemic or when the economy is re-opened after a temporary lockdown. Extending the theoretical framework proposed by Eichenbaum-Rebelo-Trabandt (2020), we distinguish goods by their degree to which they can be consumed at home rather than in a social (and thus possibly contagious) context. We demonstrate that, within the model the "Swedish solution" of letting the epidemic play out without government intervention and allowing agents to shift their sectoral behavior on their own can lead to a substantial mitigation of the economic and human costs of the COVID-19 crisis, avoiding more than 80 of the decline in output and of number of deaths within one year, compared to a model in which sectors are assumed to be homogeneous. For different parameter configurations that capture the additional social distancing and hygiene activities individuals might engage in voluntarily, we show that infections may decline entirely on their own, simply due to the individually rational re-allocation of economic activity: the curve not only just flattens, it gets reversed.

Subfields: Economics and Econometrics, Modeling and Simulation, Sociology and Political Science

View Paper: https://www.semanticscholar.org/paper/a296d9b81ba5283cd6f235392a1cc77e1209e23f

Citations in the corpus

• Supply and Demand in Disaggregated Keynesian Economies with an Application to the Covid-19 Crisis (2020, unknown): “…(2020), Caballero and Simsek (2020), Faria-e Castro (2020), Gourinchas (2020), Jones et al. (2020), Jorda et al. (2020), Kaplan et al. (2020), Krueger et al. (2020), Jorda et al. (2020), Bodenstein et al. (2020), Barro et al. (2020), Fernández-Villaverde and Jones (2020), Hall et al. (2020),…”
• The Cost of the Covid-19 Crisis: Lockdowns, Macroeconomic Expectations, and Consumer Spending (2020, unknown): “…quantify the economic costs and benefits of different policies (see Atkeson (2020), Barro et al. (2020), Eichenbaum et al. (2020), Farboodi et al. (2020), Jones et al. (2020), Kaplan et al. (2020), Krueger et al. (2020), Guerrieri et al. (2020), Alvarez et al. (2020), and Dietrich et al. (2020)).”
• Nonlinear Production Networks with an Application to the Covid-19 Crisis (2020, unknown): “…al. (2020), Caballero and Simsek (2020), Faria-e Castro (2020), Gourinchas (2020), Jones et al. (2020), Jorda et al. (2020), Kaplan et al. (2020), Krueger et al. (2020), Jorda et al. (2020), Bodenstein et al. (2020), Barrot et al. (2020), Barro et al. (2020), Fernández-Villaverde and 3See e.g.…”
• How Should Policy Responses to the COVID-19 Pandemic Differ in the Developing World? (2020, unknown): “…into the informal sector in response to a lockdown is similar to the movements out of market activities at the start of the pandemic emphasized in Krueger, Uhlig, and Xie (2020), and broadly consistent with the evidence of Zhao, Storesletten, and Zilibotti (2019) that workers respond to economic…”