Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance
View/ Open
Published Version
https://www.hks.harvard.edu/centers/cid/publicationsMetadata
Show full item recordCitation
Hausmann, Ricardo, and Ulrich Schetter. “Horrible Trade-offs in a Pandemic: Lockdowns, Transfers, Fiscal Space, and Compliance.” CID Working Paper Series 2020.382, Harvard University, Cambridge, MA, July 2020.Abstract
In this paper, we develop a heterogeneous agent general equilibrium framework to analyze optimal joint policies of a lockdown and transfer payments in times of a pandemic. In our model, the effectiveness of a lockdown in mitigating the pandemic depends on endogenous compliance. A more stringent lockdown deepens the recession which implies that poorer parts of society find it harder to subsist. This reduces their compliance with the lockdown, and may cause deprivation of the very poor, giving rise to an excruciating trade-off between saving lives from the pandemic and from deprivation. Lump-sum transfers help mitigate this trade-off. We identify and discuss key trade-offs involved and provide comparative statics for optimal policy. We show that, ceteris paribus, the optimal lockdown is stricter for more severe pandemics and in richer countries. We then consider a government borrowing constraint and show that limited fiscal space lowers the optimal lockdown and welfare, and increases the aggregate death burden during the pandemic. We finally discuss distributional consequences and the political economy of fighting a pandemic.Terms of Use
This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAACitable link to this page
https://nrs.harvard.edu/URN-3:HUL.INSTREPOS:37366418
Collections
Contact administrator regarding this item (to report mistakes or request changes)