Macroeconomic dynamics and reallocation in an epidemic: evaluating the ‘Swedish solution’

Abstract

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. We introduce a SIR epidemiological model into a neoclassical production economy in which goods are distinguished by the degree to which they can be consumed at home rather than in a social, possibly contagious context. We demonstrate within the model, that the “Swedish solution” of letting the epidemic play out without much government intervention and allowing agents to reduce their overall consumption as well as shift their consumption behavior towards relatively safe sectors can lead to substantial mitigation of the economic and human costs of the COVID-19 crisis. We argue that significant seasonal variation in the infection risk is needed to account for the two-wave nature of the pandemic. We estimate the model on Swedish health data and show that it predicts the dynamics of weekly deaths, aggregate as well as sectoral consumption, that accord well with the empirical record and the two-waves for Sweden for 2020 and early 2021. We also characterize the allocation a social planner would choose and how it would dictate sectoral consumption patterns. In so doing, we demonstrate that the laissez-faire outcome with sectoral reallocation mitigates the economic and health crisis but possibly at the expense of unnecessary deaths and too massive a decline in economic activity.

The Intergenerational Mortality Trade‐off of Covid‐19 Lockdown Policies

“…Our article complements the burgeoning body of work on the macroeconomic impact of the COVID‐19 pandemic (see, among others, Atkeson, 2020 ; Glover et al., 2020 ; Alvarez et al., 2021 ; Barrot et al., 2021 ; Baqaee and Farhi, 2020 , 2021 ; Bonadio et al., 2021 ; Kaplan et al., 2020 ; Krueger et al., 2021 ). Most closely related are Eichenbaum et al.…”

A theory of fiscal policy response to an epidemic

“…This is also the point of the rational epidemics literature that individuals rationally increase self-protection through transmission-reducing actions. Empirical evidence on the COVID-19 pandemic validates this hypothesis: for example, Yan et al (2021) find substantial voluntary avoidance behaviors in response to local infections and deaths in the US; Aum et al (2021) find that while South Korea did not impose a lockdown against COVID-19, employment fell in the sole outbreak region to a greater extent than in other regions; Krueger et al (2022) find that many Swedes stayed home on a voluntary basis, despite their government taking a lenient method.…”

Mathematical Modeling and Investigation on the Role of Demography and Contact Patterns in Social Distancing Measures Effectiveness in COVID-19 Dissemination

“…A common model used, for example, by the economists is the traditional epidemiological model SIR (susceptible-infected-recovered), as summarized by [3] and [4]. This model was used to evaluate the optimal social distancing policies [5] or incorporating them into economic models endogenizing consumption and labor supply decisions (e.g., [6,7,8,9]). Another approach in the epidemiology literature has been to study the dynamics of the pandemic in extended versions of the basic SIR model, introducing exposed (E) people and incorporating age-structured dynamics based on contact matrices at work, school, family and social environments, as in [10,11,12].…”