Working Paper

The Distributional Effects of COVID-19 and Mitigation Policies

Abstract: This paper develops a quantitative life cycle model in which economic decisions impact the spread of COVID-19 and, conversely, the virus affects economic decisions. The calibrated model is used to measure the welfare costs of the pandemic across the age, income and wealth distribution and to study the effectiveness of various mitigation policies. In the absence of mitigation, young workers engage in too much economic activity relative to the social optimum, leading to higher rates of infection and death in the aggregate. The paper considers a subsidy-and-tax policy that imposes a tax on consumption and subsidizes reduced work compared to a lockdown policy that caps work hours. Both policies are welfare improving and lead to less infections and deaths. Notably, almost all agents favor the subsidy-and-tax policy, suggesting that there need not be a tradeoff between saving lives and economic welfare.

Keywords: pandemic; coronavirus; COVID-19;

JEL Classification: D62; E21; E32; E62; I14; I15;

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Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Globalization Institute Working Papers

Publication Date: 2020-09-02

Number: 400

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