Expectations, Infections, and Economic Activity / Martin S. Eichenbaum, Miguel Godinho de Matos, Francisco Lima, Sergio Rebelo, Mathias Trabandt.

Format:

Book

Author/Creator:

Eichenbaum, Martin S.

Contributor:

National Bureau of Economic Research.

Godinho de Matos, Miguel.

Lima, Francisco.

Rebelo, Sergio.

Trabandt, Mathias.

Series:

Working Paper Series (National Bureau of Economic Research) no. w27988.

NBER working paper series no. w27988

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2020.

Summary:

The Covid epidemic had a large impact on economic activity. In contrast, the dramatic decline in mortality from infectious diseases over the past 120 years had a small economic impact. We argue that people's response to successive Covid waves helps reconcile these two findings. Our analysis uses a unique administrative data set with anonymized monthly expenditures at the individual level that covers the first three Covid waves. Consumer expenditures fell by about the same amount in the first and third waves, even though the risk of getting infected was larger in the third wave. We argue that people had pessimistic prior beliefs about the case-fatality rates that converged over time to the true case-fatality rates. Using a model where Covid is endemic, we show that the impact of Covid is small when people know the true case-fatality rate but large when people have empirically-plausible pessimistic priors about the case-fatality rate. These results reconcile the large economic impact of Covid with the small effect of the secular decline in mortality from infectious diseases estimated in the literature.

Notes:

Print version record

October 2020.