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The macroeconomics of age-varying epidemics

A new working paper from Marta Giagheddu and Andrea Papetti illustrates the pros and cons of different combinations of economic shutdown and targeted social distancing with a special focus on the dimension of intergenerational contacts.

The authors incorporate age-specific socio-economic interactions in a SIR macroeconomic model to study the role of demographic factors for the COVID-19 epidemic evolution, its macroeconomic outcomes and possible containment measures. This framework captures the endogenous response of rational individuals who freely reduce consumption- and labor-related personal exposure to the virus, with interactions that can vary within and across age groups, while fail to internalize the impact of their actions on others. In absence of intervention this amplifies the economic losses, but it also implies that individual behavioral response to the risk of infection is an important complement to the needed policy measures to contain the spread of the virus. The authors find that for any level of social distancing, the implied optimal economic shutdown generates small gains in terms of lives and large average output losses over one-year time that could be avoided, for given lives saved, with age targeted social distancing. This result is confirmed by a version of the model calibrated to match real data epidemic and economic data evolution in the first months of 2020.

Link to the paper here

By: Marta Giagheddu,

Department of International Economics - Johns Hopkins University SAIS

and Andrea Papetti,

DG for Economics, Statistics and Research, Bank of Italy

Posted by Maria Perrotta Berlin