VoxEU, January 11, 2021, with Martin Gonzalez-Eiras. HTML.
Based on the CEPR discussion paper, we draw conclusions for the pandemic endgame. We explain why Israel will likely impose a harsher lockdown than other countries, especially poor ones. And why we should expect “inverse lockdowns”—measures to stimulate social interaction.
CEPR Discussion Paper 15541, December 2020, with Martin Gonzalez-Eiras. PDF (local copy).
We propose a flexible model of infectious dynamics with a single endogenous state variable and economic choices. We characterize equilibrium, optimal outcomes, static and dynamic externalities, and prove the following: (i) A lockdown generically is followed by policies to stimulate activity. (ii) Re-infection risk lowers the activity level chosen by the government early on and, for small static externalities, implies too cautious equilibrium steady-state activity. (iii) When a cure arrives deterministically, optimal policy is dis-continous, featuring a light/strict lockdown when the arrival date exceeds/falls short of a specific value. Calibrated to the ongoing COVID-19 pandemic the baseline model and a battery of robustness checks and extensions imply (iv) lockdowns for 3-4 months, with activity reductions by 25-40 percent, and (v) substantial welfare gains from optimal policy unless the government lacks instruments to stimulate activity after a lockdown.