Pandemic Meltdown and Economic Recovery – A Multi-Phase Dynamic Model

September 28, 2022

Paper | This paper models economic output jointly with health outcomes as they pertain to the COVID pandemic, finding that a continuously varying control (i.e. the lockdown intensity) fares better than sporadically taken discrete-time decisions with lockdown intensity staying constant over some time intervals. 

Authors: Willi Semmler (TNS, NY), Jerome Henry (ECB, Frankfurt), and Helmut Maurer (University of Muenster, Germany)

This paper proposes a two-phase pandemic-economic model with phase-specific modeling and policy variables – as suggested by the chronicle of pandemic and economic policy developments over the period 2020-2021. In a first phase, the spread of a pandemic disease is the primary concern of authorities who remain attentive to economic activity. A dynamic model is introduced, embedding a two-way interaction between an extended epidemic model and output gap dynamics. In the second phase, after lockdowns, monetary policy becomes the control variable, pursuing again a joint objective of supporting a non-inflationary recovery without causing significant fatalities. The two phases are studied in a regime change model where the control and state variables as well as the objective function are allowed to change across phases. We solve the model over a finite horizon and derive the optimal lockdown or monetary policy path that jointly minimizes pandemic and economic losses. The two-phase finite horizon decision model is empirically calibrated and numerically solved through AMPL, a new solution method for finite horizon dynamic models. In the first phase, albeit with lasting adverse effects on output, lockdown-based control can be effective in reducing infection rates, but less so when starting from a negative output gap. In the second phase, accommodative monetary policy appears to be effective on both fronts, with even an eventual need for a return to tightening as output gap closes and inflation resumes.


Read the paper, published in Research in Globalizationhere.