The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis

Abstract

We develop a comprehensive framework for analyzing optimal economic policy during a pandemic crisis in a dynamic economic model that trades off pandemic-induced mortality costs against the adverse economic impact of policy interventions. We use the comparison between the planner problem and the dynamic decentralized equilibrium to highlight the margins of policy intervention and describe optimal policy actions. As our main conclusion, we provide a strong and novel economic justification for the current approach to dealing with the pandemic, which is different from the existing health policy rationales. This justification is based on a simple economic concept, the shadow price of infection risks, which succinctly captures the static and dynamic trade-offs and externalities between economic prosperity and mortality risk as the pandemic unfolds.

Reference

Tiziana Assenza, Fabrice Collard, Martial Dupaigne, Patrick Fève, Christian Hellwig, Sumudu Kankanamge, and Nicolas Werquin, “The Hammer and the Dance: Equilibrium and Optimal Policy during a Pandemic Crisis”, TSE Working Paper, n. 20-1099, May 2020.