Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/269097 
Authors: 
Year of Publication: 
2022
Series/Report no.: 
ECB Working Paper No. 2690
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
How does contagion risk affect the business cycle? We find that the presence of contagion risk significantly alters the transmission of standard macroeconomic shocks. Relative to the first-best equilibrium, the contagion externality significantly reduces the response of output to a technology shock. We also argue that the magnitude of the trade-off between health and the economy crucially depends on how the proba-bility of infection is specified. If the probability of infection only depends on agents' endogenous choices, a weaker trade-off emerges. In such a framework, and relative to the laissezfaire equilibrium, suboptimal policies such as zero COVID strategies, health insurance, or mandatory testing substantially attenuate recessions that are caused by epidemics. Therefore, policies primarily aimed at preserving public health do not necessarily come at the cost of deeper recessions.
Subjects: 
Contagion Externality
Lockdown Policies
Risk Sharing
IncompleteMarkets
JEL: 
E1
H0
I1
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-5274-3
Document Type: 
Working Paper

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