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.

More Research From These Scholars

BFI Working Paper Apr 9, 2018

Mortgage-Backed Securities and the Financial Crisis of 2008: a Post Mortem

Juan Ospina, Harald Uhlig
Topics:  Fiscal Studies, Monetary Policy
BFI Working Paper Jan 24, 2020

Central Bank Digital Currency: Central Banking For All?

Jesús Fernández-Villaverde, Daniel Sanches, Linda Schilling, Harald Uhlig
Topics:  Monetary Policy
BFI Working Paper Mar 1, 2009

Unit Roots in White Noise

Alexei Onatski
Topics:  Fiscal Studies, Monetary Policy